DRAFTING WILLS AND TRUSTS FROM AN INCOME...

(Printed on Monday, February 20, 2012 at 11:32 AM)

Drafting Wills and Trusts from an Income Tax

Perspective

A Panoply of Forms

Noel C. Ice

Cantey & Hanger, L.L.P.

2100 Burnett Plaza

801 Cherry Street

Fort Worth, Texas 76102-6898

(817) 877-2800 (Main no.)

(817) 877-2885 (Ice)

(817) 877-2807 (Fax)

State Bar ID no. 10382940

E-mail: [email protected]

Web Page: www.trustsandestates.net

Copyright 2003

Noel C. Ice

All rights reserved

mailto:[email protected]

http://www.trustsandestates.net/

(Printed on Monday, February 20, 2012 at 11:32 AM) Drafting Wills and Trusts from an Income Tax Perspective

A Panoply of Forms

Table of Contents

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DRAFTING WILLS AND TRUSTS FROM AN INCOME TAX

PERSPECTIVE

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TABLE OF CONTENTS

ARTICLE 1 TRUST ADMINISTRATIVE PROVISIONS ............................................................ 1

1.1 Valuation For Funding and Distribution Purposes-In Kind Distribution. ............... 1

1.1(a) In General. .................................................................................................... 1

1.1(b) Method For Valuing Property Distributed as a Part of a Nonprorata

Distribution of the Residuary Estate. .......................................................... 2

1.1(c) Method For Valuing Property Distributed in Satisfaction of a Pecuniary

Bequest is Fair Market Value on Date or Dates of Distribution Except for

Pecuniary Gifts Exceeding $100,000. ......................................................... 2

1.1(d) Meaning of “Fairly Representative of Appreciation or Depreciation.” ........ 3

1.1(e) Trustee Prohibited From Operating Trust As a Device To Carry On a

Business. ...................................................................................................... 3

1.2 Tax Elections. .......................................................................................................... 3

1.3 Income in Respect of a Decedent. ........................................................................... 5

ARTICLE 2 A LETTER TO THE PERSONAL REPRESENTATIVE TALKING ABOUT

INCOME TAX ISSUES, AMONG OTHER THINGS .......................................... 6

FIDUCIARY DUTIES. AN EXECUTOR IS A FIDUCIARY, AND SO IS A TRUSTEE. A

FIDUCIARY IS A PERSON THAT IS IN A SPECIAL RELATIONSHIP OF

TRUST AND CONFIDENCE WITH ANOTHER PERSON. BECAUSE OF THAT

RELATIONSHIP THE FIDUCIARY HAS A DUTY TO TREAT THAT PERSON

WITH THE UTMOST FAIRNESS IN ALL DEALINGS BETWEEN THEM. AN

EXECUTOR IS IN A FIDUCIARY RELATIONSHIP WITH THE ESTATE, AND

THE BENEFICIARIES OF THE ESTATE, AND, PERHAPS, WITH THE

CREDITORS OF THE ESTATE. AS A FIDUCIARY, THE EXECUTOR OWES

THEM SPECIAL DUTIES. A TRUSTEE IS IN A FIDUCIARY RELATIONSHIP

WITH THE TRUST AND THE BENEFICIARIES OF THE TRUST, AND AS

SUCH OWES THEM SPECIAL DUTIES. THESE DUTIES ARE OUTLINED IN A

MEMORANDUM I AM ATTACHING ENTITLED “FIDUCIARY DUTIES.” .. 6

Drafting Wills and Trusts from an Income Tax Perspective (Printed on Monday, February 20, 2012 at 11:32 AM)

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TAXPAYER IDENTIFICATION NUMBER FOR ESTATE. THE LAW REQUIRES THAT

THE ESTATE HAVE ITS OWN TIN IF IT HAS INCOME SUFFICIENT TO BE

TAXED OR IF A FORM 1041 FOR THE ESTATE WILL NEED TO BE FILED,

AS IS USUALLY THE CASE. THROUGH AN EXPEDITED APPLICATION

PROCESS, WE HAVE ALREADY OBTAINED A TAXPAYER

IDENTIFICATION NUMBER FOR THE ESTATE. THIS NUMBER IS

[EINESTATE], AND IS USED TO IDENTIFY THE ESTATE FOR TAX

PURPOSES. PLEASE MAKE SURE THAT YOUR C.P.A. REALIZES THAT

IT WILL NOT BE NECESSARY TO OBTAIN ANOTHER ONE. I HAVE

UNTIL THE END OF THE MONTH TO WITHDRAW THIS NUMBER, IF

ONE HAS ALREADY BEEN OBTAINED BY YOU OR BY YOUR

ACCOUNTANT. ................................................................................................... 6

ESTIMATED TAX PAYMENTS. ALTHOUGH TRUSTS ARE REQUIRED TO PAY

ESTIMATED INCOME TAX PAYMENTS IN THE SAME MANNER AS

INDIVIDUALS, ESTATES ARE EXEMPTED FROM THIS REQUIREMENT

FOR THE FIRST TWO TAXABLE YEARS. ESTATES MUST PAY INCOME

TAXES IN FOUR QUARTERLY INSTALLMENTS ON APRIL 15, JUNE 15,

SEPTEMBER 15, AND JANUARY 15 BEGINNING WITH THE THIRD

TAXABLE YEAR. THE SAME EXEMPTION DOES NOT APPLY TO A TRUST,

UNLESS IT IS A QUALIFIED REVOCABLE TRUST (QRT) FOR WHICH A

§645 ELECTION IS MADE, A MATTER THAT WILL BE DISCUSSED BELOW.

................................................................................................................................. 7

AS DISCUSSED LATER BELOW, I AM STRONGLY RECOMMENDING THAT YOUR

ACCOUNTANT MAKE A “§645 ELECTION” TO TREAT [TRUSTNAME] AND

THE ESTATE AS ONE TAXABLE ENTITY. THIS WILL SAVE A LOT OF

PROBLEMS IF MY ADVICE IS FOLLOWED, BUT IT WILL NOT ALLEVIATE

THE NEED TO OBTAIN A TIN FOR THE TRUST AND THE ESTATE. ......... 7

IF THE TRUST WAS SUBSTANTIALLY UNFUNDED DURING LIFE, YOU MIGHT DECIDE

TO MAKE DISTRIBUTIONS FROM THE ESTATE DIRECTLY TO ANY

SUBTRUSTS CREATED UNDER THE [TRUSTNAME], IN WHICH CASE, IT IS

ARGUABLE, THAT THERE WOULD BE NO POINT IN OBTAINING A TIN

FOR [TRUSTNAME], SINCE IT WILL NEVER HAVE ANY INCOME.

HOWEVER, SINCE IT MIGHT BE CONSIDERED TO BE IN

“CONSTRUCTIVE” RECEIPT, I STILL ADVISE OBTAINING A NEW TIN FOR

[TRUSTNAME], AND MAKING THE §645 ELECTION. .................................. 7

TAX IDENTIFICATIONS FOR SUBTRUSTS. IF SUBTRUSTS ARE CREATED, EACH ONE

SHOULD OBTAIN A NEW TIN PRIOR TO FUNDING. I AM NOT ANALYZING

HERE WHETHER OR HOW MANY SUBTRUSTS THERE ARE OR WILL BE,

AND WILL LEAVE THAT DISCUSSION FOR LATER, BUT MERELY NOTE

THAT IF [TRUSTNAME] IS TO BE FURTHER DIVIDED, NEW TINS WILL

NEED TO BE OBTAINED. THE SUBTRUSTS CREATED WILL IN ALL

PROBABILITY BE TREATED AS TRUE TRUSTS FOR TAX PURPOSES, AND

ANNUAL INCOME TAX RETURNS WILL HAVE TO BE FILED. A POSSIBLE

EXCEPTION IS NOTED BELOW. IN ANY CASE, THE RETURN SHOULD BE

A FAIRLY EASY MATTER TO TAKE CARE OF. ............................................. 7


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POSSIBLE GRANTOR TRUST TREATMENT UNDER IRC §678 IF SOLE BENEFICIARY

IS ALSO (OR BECOMES THE) SOLE TRUSTEE. IF THE SOLE TRUSTEE

OF A TRUST IS ALSO THE BENEFICIARY OF THE TRUST, AND IF THE

TRUSTEE HAS THE POWER TO DISTRIBUTE INCOME AND CORPUS TO

HIM OR HERSELF “WITHOUT REGARD TO OTHER AVAILABLE ASSETS,”

THEN I BELIEVE THAT IT IS POSSIBLE TO ARGUE THAT THE TRUST IS A

“GRANTOR TRUST” FOR TAX PURPOSES, BECAUSE OF THE

APPLICATION OF IRC §678. A FORTIORI, IF THE SOLE TRUSTEE IS THE

BENEFICIARY OF A TRUST THAT REQUIRES ALL INCOME TO BE

DISTRIBUTED ANNUALLY, THE TRUST OUGHT TO BE TREATED AS A

GRANTOR TRUST, AT LEAST WITH RESPECT TO ORDINARY INCOME.

THE ARGUMENT IS AGGRESSIVE WHERE ALL INCOME IS NOT

“REQUIRED” TO BE DISTRIBUTED, AND IS SOMEWHAT LESS STRONG IF

THE DISTRIBUTION TERMS ARE OTHERWISE DIFFERENT THAN THOSE

RECITED. THE CONSERVATIVE COURSE IS MOST LIKELY TO TREAT

ANY SUCCESSOR TRUSTS AS TAXABLE TRUSTS FOR INCOME TAX

PURPOSES (WITH SEPARATE AND SPECIAL CONSIDERATION BEING

GIVEN IF THE TRUST HAS A MANDATORY INCOME DISTRIBUTION

PROVISION AND THE SOLE TRUSTEE IS THE SOLE BENEFICIARY). BUT

IF INCOME WILL BE ACCUMULATED IN SUCH A TRUST, YOU MUST BE

MINDFUL THAT AT THE PRESENT TIME TRUST INCOME TAX RATES ARE

FAIRLY STEEP. ON THE OTHER HAND, A TRUST GETS WHAT IS KNOWN

AS A “DISTRIBUTION DEDUCTION” FOR INCOME THAT IS DISTRIBUTED,

AND THIS CAN AMELIORATE THE PROBLEM. OF COURSE, IF §678

APPLIES, AND THE TRUST IS TREATED AS A GRANTOR TRUST, THEN

THE TRUST INCOME TAXATION RATES DO NOT APPLY AT ALL. AGAIN,

IF YOU CHOOSE TO ARGUE THAT §678 APPLIES, WE NEED TO DISCUSS

THE RISKS AND BENEFITS IN GREATER DETAIL, WHETHER OVER THE

PHONE OR IN PERSON. ...................................................................................... 7

SINCE THE INCOME TAX REPORTING FOR THE TRUSTS WILL NOT BE HANDLED BY

ME OR MY OFFICE, BUT SHOULD BE HANDLED BY YOUR C.P.A., YOUR

C.P.A. SHOULD BE CLOSELY CONSULTED ABOUT THE FINAL

REPORTING POSITION YOU WILL TAKE. I INCLUDE THE ABOVE

DISCUSSION IN ORDER TO MAKE THE C.P.A.'S JOB EASIER, AND TRUST

THAT YOU WILL SHARE AT LEAST THIS PORTION OF THE LETTER WITH

YOUR C.P.A., UNLESS THE C.P.A. THAT WILL DO YOUR TAX REPORTING

IS BEING COPIED ON THIS LETTER. IN THIS REGARD, I AM ENCLOSING A

SEVEN PAGE ARTICLE TAKEN FROM PROBATE AND PROPERTY

MARCH/APRIL 2002, WRITTEN BY JONATHAN BLATTMACHR AND

BRIDGET CRAWFORD. THIS IS DONE TO ASSIST YOUR C.P.A. (OR TO

CONVINCE YOU HOW DIFFICULT THIS SIMPLE QUESTION OF TINS

ACTUALLY IS). .................................................................................................... 8

HOW SHOULD A TRUST BANK ACCOUNT BE STYLED? I WANT TO EMPHASIZE

THAT A TRUST IS NOT ITSELF A LEGAL ENTITY IN TEXAS, BUT CAN

ONLY ACT BY AND THROUGH A TRUSTEE. THEREFORE, THE NAME OF

THE TRUSTEE, AS SUCH, SHOULD BE ON ALL LEGAL DOCUMENTS,

INCLUDING ALL ACCOUNTS WITH FINANCIAL INSTITUTIONS. SO, FOR

EXAMPLE, YOU SHOULD PLACE “[NAME OF TRUSTEE], TRUSTEE”

BEFORE THE NAME OF THE TRUST. FOR EXAMPLE: ................................. 8


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NOTICE CONCERNING FIDUCIARY RELATIONSHIP. ENCLOSED IS AN IRS FORM 56,

NOTICE CONCERNING FIDUCIARY RELATIONSHIP. IT IS TECHNICALLY

DUE [DATEFORM56DUE]. PLEASE SIGN AND RETURN THIS FORM TO US

FOR FILING. .......................................................................................................... 9

ARTICLE 3 MODEL LETTER TO CLIENT REGARDING THE FORM 706 AND THE ISSUE

OF WHETHER TO TAKE THE §642(G) SWING ITEMS ON THE ESTATE OR

THE FIDUCIARY INCOME TAX RETURN, AND INCLUDING A DISCUSSION

OF THE §2204(A) AND THE §6905 ELECTIONS ............................................ 18

ENCLOSED HEREWITH IS WHAT MAY BE THE FINAL VERSION OF THE FEDERAL

ESTATE TAX RETURN FORM 706 AND TEXAS INHERITANCE TAX

RETURN. WE HAVE MADE A FEW MINOR ADJUSTMENTS HERE AND

THERE FROM WHAT I SENT YOU LAST, BUT NONE OF THE CHANGES

ARE DRAMATIC. ................................................................................................ 18

ARTICLE 4 MEMO TO CLIENT REGARDING THE IRC §645 ELECTION WHERE

DECEDENT DIED AFTER DECEMBER 23, 2002 ............................................ 24

4.1 The “§645 Election” In GENERAL. ..................................................................... 24

4.2 The Statute Itself. .................................................................................................. 24

4.3 What is a QRT? ..................................................................................................... 25

4.4 Effective date of final regulations. ........................................................................ 26

4.5 What Are Some of the Different Tax Rules Applicable to Trusts and Estates, in the

Absence of a §645 Election? / Reasons for Making the §645 Election? .............. 26

4.6 When Must the §645 Election be Made? .............................................................. 27

4.7 How is the §645 Election Made? .......................................................................... 27

4.8 How Long Does the Election Remain in Effect? .................................................. 27

4.9 Special TIN Rules. ................................................................................................ 28

4.9(a) TIN for the QRT or TINs for Multiple QRTs. ............................................ 28

4.9(b) TIN for the Estate. ...................................................................................... 29

4.10 Application of the Separate Share Rules. .............................................................. 30

ARTICLE 5 MEMO TO CLIENT REGARDING THE IRC §645 ELECTION WHERE

DECEDENT DIED BEFORE DECEMBER 24, 2002 ......................................... 32

5.1 The “§645 Election” In GENERAL. ..................................................................... 32

5.2 The Statute Itself. .................................................................................................. 33

5.3 Rev. Proc. 98-13 .................................................................................................... 33

5.4 What Are Some of the Different Tax Rules Applicable to Trusts and Estates, in the

Absence of a §645 Election? ................................................................................. 36

5.5 Application of the Separate Share Rules. .............................................................. 37


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DRAFTING WILLS AND TRUSTS FROM

AN INCOME TAX PERSPECTIVE

A Panoply of Forms

By Noel C. Ice

The following is not a typical outline of income

tax issues in the administration of trusts and

estates. Rather, it is a series of forms, beginning in

Article I with some typical will and trust clauses

dealing with income tax issues. There follow a

couple of letters and memos, used to fully apprise

the poor fiduciary of the nuts and bolts issues that

cannot be avoided, such as— “Do I need to get

one or more taxpayer identification numbers, and,

if so, how do I do it? Where do I deduct

administrative expenses? What is the §645

election, and why is it so complicated? What is

DNI and how is it affected by the separate share

rule? Will there be gain when I fund a trust?”

If you do not tell the fiduciary about these rules

who will? If you do not do it in writing, do you

really expect the fiduciary to recall your oral

explanation? Perhaps you could just say, “Don’t

do anything at all without consulting me first,” but

this simply may not be practical; moreover, all the

lawyer can do is to advise; it is the fiduciary who

has the responsibility of making ultimate

decisions. These decisions must be made on a

fully informed basis, and cannot always be done

meaningfully merely on the basis of a prior oral

conversation with counsel. Even if all of the

technical issues are explained, in detail, orally, it

is not reasonable to expect the fiduciary to absorb

and be able to recall all that was said; unless,

perhaps, the fiduciary is a professional fiduciary. I

maintain that the lawyer should strive to give the

fiduciary written instructions about what the

fiduciary may need to know to execute the office.

Unfortunately, it is impossible to give all the

information that might be needed without

bombarding the fiduciary with more data that the

fiduciary can possibly absorb. Thus, a reasonable

approximation is the most that can ever be

achieved. Even then, the fiduciary would probably

wish you had been less informative. You can’t

win. All you can do is try.

The sample letters below cover a lot more than

just income tax issues, but I thought I would throw

the whole of them in for your benefit without

editing, since I believe you will find them useful. I

will confine my oral remarks to the income tax

issues found in the letters.

ARTICLE 1 TRUST ADMINISTRATIVE PROVISIONS

The following provisions in this Article are will

and trust clauses, which treat income tax issues,

which I commonly use, and which I excised for

your consideration.

1.1 VALUATION FOR FUNDING AND

DISTRIBUTION PURPOSES-IN KIND

DISTRIBUTION.

1.1(a) In General.

Unfortunately, when property, including

cash, is distributed in satisfaction of a gift

that is not a specific gift, it will often be

necessary to value the entire estate

available for distribution as of the date of

distribution, depending on the valuation

method required by the governing

instrument. Revaluation can be necessary,

for example, if the distribution is in

satisfaction of a fractional share gift (e.g., a

gift of a fraction of the residuary estate), if

some beneficiaries of the gift receive

different assets than others (i.e., a

nonprorata distribution), as is generally

permitted but not required under this

instrument; or if prorata distributions are

not made at the same time. Revaluation is

presumably also necessary in the case of a

pecuniary distribution made under a Rev.

Proc. 64-19 approach, in order to be able to

demonstrate that such a distribution is

“fairly representative of appreciation and

depreciation” of all assets available for

distribution. If a pecuniary gift is to be

satisfied with property other than cash at

its “fair market value on the date of

distribution,” it will usually be necessary

to recognize capital gain if the value of the

property at the time of distribution exceeds

its basis for federal income tax purposes;

or, at least that is the probable IRS’

position.


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1.1(b) Method For Valuing Property

Distributed as a Part of a Nonprorata

Distribution of the Residuary Estate.

Except as otherwise specifically provided

to the contrary herein, fractional share gifts

that are not specific gifts, including gifts of

the residuary estate, may be funded on a

nonprorata basis (pick-and-choose)

provided funding is based on either (1) the

fair market value of all of the assets

available for funding on the date or dates

of funding or (2) in a manner that fairly

reflects the net appreciation or depreciation

in the value of all of the assets measured

from the date of death to the date(s) of

funding. Unless otherwise specified herein,

the fiduciary will have the reasonable

discretion to determine which of the two

funding methods to use.1

[Note that a true pick-and-choose

fractional share, as described in (1),

apparently allows the fiduciary to play

around with the basis. E.g., as long as each

beneficiary receives assets equal in value

to the beneficiary’s proportionate share of

the fair market value of the entire fund

subject to division, the fact that one

beneficiary may receive low basis and the

other high basis assets, is irrelevant for tax

purposes. Arguably, method (2), Rev.

Proc. 64-19,2 requires that the assets

themselves fairly reflect the appreciation

and depreciation.3 The GST regulations are

1 See PLRs 8447003, 932037 and 9143018.

2 Rev. Proc. 64-19, 1964 C.B. 682.

3 See BNA Tax Management Portfolio 843-1

st at

VIII, by Professor Jeffrey N. Pennell, and BNA Tax

Management Portfolio 800-1st at V.D.5.d.4, by Professor

Wm. P. Streng. Here is the language approved in Rev. Proc. 64-

10:

even more explicit than Rev. Proc. 64-19

on this subject.4]

1.1(c) Method For Valuing Property

Distributed in Satisfaction of a

Pecuniary Bequest is Fair Market Value

on Date or Dates of Distribution Except

for Pecuniary Gifts Exceeding $100,000.

Except as otherwise specifically provided

to the contrary, a pecuniary gift of

$100,000 or less will be satisfied using

assets having a fair market value at the

date or dates of distribution equal to the

pecuniary amount of the gift. However, in

the case of distributions in satisfaction of

pecuniary gifts of over $100,000, the cash

and other property distributed will have an

I hereby agree that the assets to be distributed in

satisfaction of this bequest or transfer in trust will be

selected in such manner that the cash and other

property distributed will have an aggregate fair market

value fairly representative of the pecuniary legatee's (or

transferee's) proportionate share of the appreciation or

depreciation in the value to the date, or dates, of

distribution of all property then available for

distribution in satisfaction of such pecuniary bequest or

transfer.

I personally do not agree with what I think is the

position of Professors Pennell and Streng (whose position there is a

remote possibility I may be misconstruing). 64-19 only says that

the value must be “fairly representative” of the beneficiary’s

“proportionate share of the appreciation or depreciation in

the value” of the property. I don’t see that it is clear that this

requires that the basis of the property distributed reflect the change

in value. However, the fairly representative wording used in the

GSTT regs. -reproduced in full by the following footnote- is

slightly more explicit on this issue, without, however, being

entirely without ambiguity. Treas. Reg. §26.2654-1(a)(1)(2)(B)

states that the “assets” themselves will be allocated “in a manner

that fairly reflects net appreciation or depreciation in the

value of the assets.”

4 Treas. Reg. §26.2654-1(a)(1)(2)(B) provides:

If the pecuniary amount is payable in kind on the basis of

value other than the date of distribution value of the

assets, the trustee is required to allocate assets to the

pecuniary payment in a manner that fairly reflects net

appreciation or depreciation in the value of the assets in the fund available to pay the pecuniary amount

measured from the valuation date to the date of payment.

The GST language is slightly less ambiguous than the 64-19

language, the former appearing to require that the assets themselves

be allocated in a manner reflecting appreciation and depreciation,

where the latter arguably only requires that the value of the assets

reflect the change.


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aggregate fair market value fairly

representative of the pecuniary

beneficiary’s proportionate share of the

appreciation or depreciation of all

property then available for distribution in

satisfaction of the pecuniary gift.

1.1(d) Meaning of “Fairly

Representative of Appreciation or

Depreciation.”

The phrase “fairly representative of the

pecuniary beneficiary’s proportionate

share of the appreciation or depreciation”

or “fairly reflects net appreciation or

depreciation” or “fairly representative of

appreciation or depreciation,” when used

in connection with the valuation or funding

of a pecuniary gift under this instrument,

will all generally have the same meaning

as the latter phrase has when it is used in

Rev. Proc. 64-19; or, in the case of GSTT

property, as the second phrase has in the

final treasury regulations governing

Chapter 13 of the IRC. Maker believes that

this means that the value of the property

subject to this valuation method will

generally be deemed to equal the fair

market value of the property on the date

used for determining basis for federal

income tax purposes, but that the property

used to satisfy the gift subject to the

standard will fairly reflect net

appreciation and depreciation (occurring

between the basis determination date and

the date of distribution) in all of the assets

from which the distribution could have

been made. Maker believes that in the case

of property included in the Maker’s gross

estate, the value of property for this

purpose is its value for purposes of chapter

11 of the IRC, but that if the property was

not included in the gross estate (e.g., the

property is the sales proceeds of property

included in the estate), the value of the

property will, presumably, be its federal

income tax value (adjusted basis).

Notwithstanding the foregoing, this

valuation funding provision will be

implemented, interpreted, or modified by

the Decedent’s fiduciary as and if

necessary in order to be consistent with the

usage of the terminology in Rev. Proc. 64-

19, and, in the case of GSTT property, to

comply with any final treasury regulations

governing Chapter 13 of the IRC at the

date of distribution, in order that the

denominator of the “applicable fraction”

(for GSTT purposes with respect to an

Exempt Share or Trust) will equal in value

the available GSTT exemption, consistent

with Maker’s manifest intent elsewhere

expressed. In this regard “[i]f the

pecuniary amount is payable in kind on the

basis of value other than the date of

distribution value of the assets, the trustee

is required to allocate assets to the

pecuniary payment in a manner that fairly

reflects net appreciation or depreciation in the value of the assets in the fund

available to pay the pecuniary amount

measured from the date of death to the date

of payment.”5

1.1(e) Trustee Prohibited From

Operating Trust As a Device To Carry

On a Business.

Although the fiduciaries have been given

broad powers, including the power to carry

on a business under appropriate

circumstances, the trusts created under this

instrument are created for the primary

purpose of protecting or conserving the

trust property for beneficiaries, and,

following the death of Maker, the trustee is

prohibited from operating the trust simply

as a device to carry on a profit-making

business to the exclusion of the primary

purpose.

* * * *

1.2 TAX ELECTIONS.

(1) The IRC permits or requires a

fiduciary to make certain tax elections as

an incidental consequence of the discharge

of its fiduciary duties, including at various

times and in various contexts:

(A) whether to elect to file a

joint return with a spouse under the

provisions of §6013(a) of the IRC,

5 Treas. Reg. §26.2654-1(a)(1)(2)(B).


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(A-1) whether an estate tax

deduction will be taken for estate

transmission6 and estate

management expenses7, or whether

such expenses will be deducted on

the probate estate's federal income

tax return, or deducted in part on

each,

(A-2) whether and to what extent

to make an election pursuant to

§2056(b)(7)(B)(v) to qualify

certain terminable interest property,

if any, for the estate tax marital

deduction,

(B) whether and to what extent

to make an election under

§643(e)(3) of the IRC,

(C) whether and where and to

what extent to make an allocation

of the Generation Skipping

Transfer Tax (GSTT) exemption

under §2631(a) of the IRC for

purposes of determining the

“inclusion ratio” described in

Chapter 13 of Subtitle B of the

IRC,

(D) to elect a taxable year,

which may be a fiscal or a calendar

year, under the provisions of §441

of the IRC ,

(E) the date that should be

selected for the valuation of

property in a gross estate for

federal and state death tax

purposes,

(F) whether any portion of an

estate should be valued under any

of the applicable provisions of

§2032A of the IRC,

6 We usually take these on the 706 if a marital

deduction is wanted, since the marital deduction is reduced

dollar for dollar by any estate transmission expenses not

taken on the 706.

7 We always take these on the 1041 if a reduce to

zero marital deduction is available, because doing so does

not reduce the marital deduction.

(G) whether any portion of the

federal estate tax liability for an

estate will be paid under any

deferred payment option available

to Maker's estate under the IRC,

(H) whether a deduction will be

taken as an income tax deduction or

as an estate tax deduction,

(I) whether and to what extent to

elect to report on Maker's final

income tax return unrecognized

income from United States Series E

and EE savings bonds,

(J) whether to make, terminate or

revoke an S-Corporation election

under §1362 of the IRC.

(K) whether to make an election

to qualify a trust as an “electing

small business trust” under IRC

§1361(e).

(2) The fiduciaries are specifically given

the discretion to make all tax elections,

including those enumerated above. In the

case of a tax election affecting Maker’s

probate estate, such election will be made

by Maker’s executor or as otherwise

required by law in order to make the

election. Such elections will be made in a

fiduciary capacity, after considering the

income and estate tax consequences and

the intent expressed in this instrument.

However, a fiduciary will not be liable to

anyone for any adverse tax consequence

occasioned by the exercise or nonexercise

of such election, if made in good faith.

(3) An allocation of receipts and

expenditures between income and corpus

for fiduciary accounting purposes need not

follow the allocation for tax reporting

purposes. However, a fiduciary may, but

need not, make compensating adjustments

between income or principal or in the

amount of any gift under this instrument as

a result of a tax election.

(4) In addition, no liability will be

incurred by the mere fact that the

exercise or nonexercise of a tax election

benefits Maker's spouse, it being


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intended to provide for Maker's spouse

during such spouse's lifetime. If (as is

hereby expressly authorized) Maker's

executor joins with Maker's spouse (or the

estate of Maker's spouse if Maker's spouse

is deceased) on Maker's behalf in filing

income tax returns, or consents for gift tax

purposes to having gifts made by either of

them during Maker's life considered as

made one-half (1/2) by each of them, any

resulting liability will be borne as

prescribed by law.

1.3 INCOME IN RESPECT OF A

DECEDENT.

Unless this instrument specifically provides

otherwise elsewhere (e.g., only to the extent

consistent with my manifest and paramount intent

explicitly set forth in the above Subsections that

deal with the MRD Rules), if a pecuniary or a

residuary gift to Charity is made under this

instrument, the principal amount of the gift will be

satisfied, as a matter of right, first out of any

income in respect of a decedent (691 items)

otherwise available for that purpose, before any

other properties are allocated, and second, if need

be, out of other net income of the residuary estate.

If there is more than one such gift, the 691 items

and other income will be pro rated between them

(691 items first, other income, if need be, second).

If the 691 items exceed the value of the charitable

gift, the charity(ies) will be entitled to a fractional

share of the 691 items and no other income.

Notwithstanding anything else herein to the

contrary, the fractional share will be a true

fraction, with no “pick and choose” power in the

fiduciary. The allocation of income under this

Section (if needed to satisfy the principal amount

of a gift to Charity) will not, however, have the

effect of reducing the value of any other gift or

right to income in a beneficiary. Thus, if the

allocation of income under this Section would

have that effect (but for this sentence), then

Maker’s fiduciary will make whatever equitable

adjustment out of corpus is necessary to make the

beneficiary (including the charity itself) whole.


A Panoply of Forms

6

ARTICLE 2 A LETTER TO THE PERSONAL

REPRESENTATIVE TALKING ABOUT

INCOME TAX ISSUES, AMONG OTHER

THINGS8

[TOWHOM]

[HOME_STREET]

[HOME_CITY], [HOME_STATE]

[HOME_ZIP]

[PhoneBusMain] (Business)

[PhoneHomeMain] (Home)

[PhonesImptOther]

[FAX] (FAX)

[EMail]

[WESITE]

RE: Estate of

[DecedentFullName],

Deceased

[DecedentFullName],

Deceased

Probate Cause No.:

[ProbateCauseNo]

Date of Death: [DateOfDeath]

[Dear [SALUTATION]:

I realize that this is a lengthy letter, so

please bear with me. I have worked long and hard

on this letter, with the intent to reduce to writing

in one place most of what you will need to know

to fulfill your duties as [TitleOfExecutor]. The

letter covers a lot of ground, but it covers things

you will or may need to know. If you read it

carefully I think it will help you understand much

of what estate and trust administration is all about.

This letter and the attachments can serve as a

roadmap and a reference for the future. Although,

in the interest of full disclosure to interested

parties, I may be copying others on this letter,

including, perhaps, beneficiaries, I want to

make sure that everyone knows that I am

representing you alone, in your fiduciary

capacity, and am not representing anyone else

8 See the Texas Probate System, 3

rd Edition, Letter

23 (James Brill, Editor), which inspired this letter, and

which can be used as a good form to use in combination

with the following.

connected with the estate, even though it is my

intent and desire to keep them informed of

much that is going on in the estate.

Fiduciary Duties. An executor is a

fiduciary, and so is a trustee. A fiduciary is a

person that is in a special relationship of trust and

confidence with another person. Because of that

relationship the fiduciary has a duty to treat that

person with the utmost fairness in all dealings

between them. An executor is in a fiduciary

relationship with the estate, and the beneficiaries

of the estate, and, perhaps, with the creditors of

the estate. As a fiduciary, the executor owes them

special duties. A trustee is in a fiduciary

relationship with the trust and the beneficiaries of

the trust, and as such owes them special duties.

These duties are outlined in a memorandum I am

attaching entitled “Fiduciary Duties.”

***TAXPAYER IDENTIFICATION

NUMBERS

(herein “TINs” or “EINs”)

Unfortunately, this is an area where the

IRS has gone out of its way to add considerable

complexity to the law.

Form SS-4. I am enclosing one or more

IRS Form(s) SS-4 which require your signature in

order that the number we have obtained for you

will be valid. Please sign and return the SS-4(s) to

me, as soon as possible. For your convenience in

this regard, I am enclosing a stamped, self-

addressed, return envelope.

Ordinarily, it is necessary to obtain

taxpayer identification numbers for everyone who

must file a tax return in connection with the estate

or any trust closely connected with the estate, if a

TIN does not exist for the taxpayer already. For

example, if there are any trusts to be funded, each

trust will need its own TIN, unless perhaps, the

trusts are “grantor trusts” under IRC §678, a

subject that may require a separate discussion.

Further, if the estate will have any income to

report, then a TIN for the estate will have to be

obtained. The [TrustName] became irrevocable

upon [theDecedent]'s death. Therefore it will also

be necessary to get a new TIN number for that

trust.

Taxpayer Identification Number For

Estate. The law requires that the estate have its


A Panoply of Forms

7

own TIN if it has income sufficient to be taxed or

if a Form 1041 for the estate will need to be filed,

as is usually the case. Through an expedited

application process, we have already obtained a

Taxpayer Identification Number for the Estate.

This number is [EINEstate], and is used to

identify the estate for tax purposes. Please make

sure that your C.P.A. realizes that it will not be

necessary to obtain another one. I have until

the end of the month to withdraw this number,

if one has already been obtained by you or by

your accountant.

Estimated Tax Payments. Although trusts

are required to pay estimated income tax payments

in the same manner as individuals, estates are

exempted from this requirement for the first two

taxable years.9 Estates must pay income taxes in

four quarterly installments on April 15, June 15,

September 15, and January 15 beginning with the

third taxable year. The same exemption does not

apply to a trust, unless it is a Qualified Revocable

Trust (QRT) for which a §645 election is made, a

matter that will be discussed below.

Taxpayer Identification Number For

Living Trust. Since [theDecedent]'s portion of

[TrustName] became irrevocable at death, we will

almost certainly need one or more taxpayer

identification numbers for the new (now)

irrevocable trust, as well as the subtrusts to be

created under it, if any. We have already a

obtained TIN [TINRevocableTrust] for you to

use. Please make sure that your C.P.A. realizes

that it will not be necessary to obtain another

one. I have until the end of the month to

withdraw this number, if one has already been

obtained by you or by your accountant.

As discussed later below, I am strongly

recommending that your accountant make a “§645

Election” to treat [TrustName] and the estate as

one taxable entity. This will save a lot of problems

if my advice is followed, but it will not alleviate

the need to obtain a TIN for the trust and the

estate.

If the trust was substantially unfunded

during life, you might decide to make distributions

from the estate directly to any subtrusts created

9 IRC §§6654(l).

under the [TrustName], in which case, it is

arguable, that there would be no point in obtaining

a TIN for [TrustName], since it will never have

any income. However, since it might be

considered to be in “constructive” receipt, I still

advise obtaining a new TIN for [TrustName], and

making the §645 Election.

Tax Identifications For Subtrusts. If

subtrusts are created, each one should obtain a

new TIN prior to funding. I am not analyzing here

whether or how many subtrusts there are or will

be, and will leave that discussion for later, but

merely note that if [TrustName] is to be further

divided, new TINs will need to be obtained. The

subtrusts created will in all probability be treated

as true trusts for tax purposes, and annual income

tax returns will have to be filed. A possible

exception is noted below. In any case, the return

should be a fairly easy matter to take care of.

Possible Grantor Trust Treatment

Under IRC §678 if Sole Beneficiary is Also (or

becomes the) Sole Trustee. If the sole trustee of a

trust is also the beneficiary of the trust, and if the

trustee has the power to distribute income and

corpus to him or herself “without regard to other

available assets,” then I believe that it is possible

to argue that the trust is a “grantor trust” for tax

purposes, because of the application of IRC §678.

A fortiori, if the sole trustee is the beneficiary of a

trust that requires all income to be distributed

annually, the trust ought to be treated as a grantor

trust, at least with respect to ordinary income. The

argument is aggressive where all income is not

“required” to be distributed, and is somewhat less

strong if the distribution terms are otherwise

different than those recited. The conservative

course is most likely to treat any successor trusts

as taxable trusts for income tax purposes (with

separate and special consideration being given if

the trust has a mandatory income distribution

provision and the sole trustee is the sole

beneficiary). But if income will be accumulated in

such a trust, you must be mindful that at the

present time trust income tax rates are fairly steep.

On the other hand, a trust gets what is known as a

“distribution deduction” for income that is

distributed, and this can ameliorate the problem.

Of course, if §678 applies, and the trust is treated

as a grantor trust, then the trust income taxation

rates do not apply at all. Again, if you choose to


A Panoply of Forms

8

argue that §678 applies, we need to discuss the

risks and benefits in greater detail, whether over

the phone or in person.

Since the income tax reporting for the

trusts will not be handled by me or my office, but

should be handled by your C.P.A., your C.P.A.

should be closely consulted about the final

reporting position you will take. I include the

above discussion in order to make the C.P.A.'s job

easier, and trust that you will share at least this

portion of the letter with your C.P.A., unless the

C.P.A. that will do your tax reporting is being

copied on this letter. In this regard, I am enclosing

a seven page article taken from Probate and

Property March/April 2002, written by Jonathan

Blattmachr and Bridget Crawford. This is done to

assist your C.P.A. (or to convince you how

difficult this simple question of TINs actually is).

How Should a Trust Bank Account be

Styled? I want to emphasize that a trust is not

itself a legal entity in Texas, but can only act by

and through a trustee. Therefore, the name of the

trustee, as such, should be on all legal documents,

including all accounts with financial institutions.

So, for example, you should place “[Name of

Trustee], Trustee” before the name of the trust.

For example:

[Name of Trustee] (or successor), Trustee

under [Name of Subtrust], created under

[Name of Original Trust or Last Will and

Testament], originally signed by [name of

Settlor] on [date of signature], who died on

[date of death].

Please note that this example does not suit

your particular case, because it is a generic

example. We can talk later about exactly how to

style a particular trust account, distribution deed,

etc.

The original trust instrument provides that

all of the trusts under it can be freely renamed (I

think), and technically (you may find this hard to

believe), a trust does not have a legal name as

such, since it is not a legal entity. Instead, the

name is a convenient way to describe the

document under which the trust relationship was

created. The holder of legal title is the trustee, as

such, and not the trust. This is all very theoretical,

and as a practical matter, you may find that how

you end up having to style the trust accounts is, as

a matter of practical convenience, whatever the

financial institution requires.

***The All Important IRC §645 Election to Treat

a Revocable Trust Under the Rules Applicable to

Decedent's Estates or to Combine the Trust and

the Estate.

Although we feel strongly that this law

firm is best qualified to prepare estate and gift tax

returns, because of the specialized nature of those

returns and the issues they involve, we generally

do not prepare income tax returns. As indicated

elsewhere in this letter, income tax reporting for

estates and trusts is important, and we expect that

this will be done by an accountant you hire.

However, because not all accountants are familiar

with the income tax issues associated with estates

and trusts, we would hope that whoever prepares

the income tax reporting, the Form 1041 for the

estate, the trust, etc., will consult carefully with us,

at each stage, and, although I do not insist on it, I

strongly recommend that we be given pro forma

copies of income tax filings well in advance of the

due date, with the understanding that we are under

no obligation to review them for accuracy.

Notwithstanding this delegation of the

income tax reporting, there are some matters that

are so important that I will point them out here so

that you will be aware of them, and, if this letter

(or parts of it) are given to the accountant, the

accountant too will be advised ahead of time of

certain issues we think particularly important. One

of those issues is the election to treat [TrustName]

and the estate as one tax reporting entity, if

[TrustName] qualifies as a QRT, which stands for

“Qualified Revocable Trust.” I am enclosing a

memo entitled “The All Important IRC §645

Election to Treat a Revocable Trust Under the

Rules Applicable to Decedent's Estates or to

Combine the Trust and the Estate.” I suggest that

you give a copy of this memo to your accountant,

with the proviso that the accountant not rely on it

(since the law changes so rapidly, and because I

did not tailor the memo), but use it only as a basis

for further research.

***Distributions During

Administration. Note that certain types of

distributions have the effect of carrying out Estate

income, called “distributable net income” or DNI.

The effect of this is that the Estate gets a


A Panoply of Forms

9

distribution deduction and the beneficiary receives

taxable income as a result of the distribution.

These rules can be very complicated, and can

result in one beneficiary receiving taxable income

and another nontaxable income. In that case the

beneficiary that received the taxable income may

object and claim a right to be reimbursed. For this

reason you should work closely with me and with

your accountant before making interim

distributions, particularly ones that are

disproportionate during the same taxable year.

To complicate (or simplify, depending on your

perspective) things further, there are “separate

share” rules that overlay the distribution deduction

rules. These rules have always applied to trusts,

but now they apply to estates as well. “The general

effect of the separate share rule is to limit the

amount of DNI that is carried out to each

beneficiary (which is taxable to the beneficiary,

§662(a), and deductible to the estate, §661(a)) to

the DNI that is allocable to each beneficiary’s

separate share.”10

Notice Concerning Fiduciary

Relationship. Enclosed is an IRS Form 56, Notice

Concerning Fiduciary Relationship. It is

technically due [DateForm56Due]. Please sign and

return this form to us for filing.

Estate Bank Account. Since we now have

a tax identification number ([EINEstate]) for the

estate, you should establish as soon as possible a

separate checking account for the Estate to be

administered by you as [TitleOfExecutor]. As will

be discussed further below, all debts and

obligations of the Estate should be paid from this

account and, in addition, the account should serve

as a depository for Estate funds. You may also

wish to open a savings account for the Estate to

hold any surplus funds. Both the checking and the

savings account may be opened at the bank of

your choice. The bank will need to know the

taxpayer identification number described above to

open the account.

The Estate bank account (or other assets

titled in the name of the Estate) can be held in the

following form: [NameofFirstExecutor] and

[NameofCoExecutor], [TitleOfExecutor] of the

Estate of [DecedentFullName], Deceased. The

10 Akers, Post Mortem Estate Administration.

tax identification number of the Estate, rather than

your own social security number, should be used

in this connection.

Accounting for Estate Income. From

[DateOfDeath] and continuing during the period

of administration of the Estate, all property that

was formerly the community property of

[NameOfSurvivingSpouse] and [theDecedent] will

be treated as being owned in equal shares by

[NameOfSurvivingSpouse] and the Estate as

tenants in common. In addition, all property that

was formerly [theDecedent]’s separate property

will be treated as being owned entirely by the

Estate, and, of course,

[NameOfSurvivingSpouse]’s separate property

will continue to be owned entirely by [him/her]. In

connection with this, it is important to note that if

the Estate's funds become commingled with

[NameOfSurvivingSpouse]’s personal funds, then

the Estate may be deemed to have made a

distribution to [him/her] for income tax purposes

and the Estate's income will be taxed to [him/her]

to the extent of such distribution. Therefore, in

order to make it clear that income has not been

distributed from the Estate to [him/her] and to

thereby utilize the Estate as another income

taxpayer, from [DateOfDeath] and continuing

during the administration period, all income from

[theDecedent]'s separate property and one-half of

the income from the community property should

be deposited in the Estate's bank account. The

allocation of the former income of

[NameOfSurvivingSpouse] and [theDecedent] in

this manner may achieve income tax savings due

to the fact that such income will be split between

two taxpayers ([NameOfSurvivingSpouse] and the

Estate).

Accounting for Estate Assets. In

connection with this matter, it should be pointed

out that all cash owned by [theDecedent] as

separate property at the time of death, as well as

one-half of all cash owned by

[NameOfSurvivingSpouse] and [theDecedent] as

community property at the time of death should be

deposited in the Estate's bank account. However,

all income from [NameOfSurvivingSpouse]’s

separate property, as well as any Social Security

(and possibly pension or annuity benefits) payable

to [NameOfSurvivingSpouse] individually, belong


A Panoply of Forms

10

entirely to [him/her] and should not be deposited

in the Estate's bank account.

Marshalling the Assets. After you have

located all of [theDecedent]’s assets, those assets

need to be secured and possession taken. In the

case of bank accounts, accounts with brokerage

companies, etc., it may be helpful to have those

accounts re-titled in the name of the Estate, or to

move the account into an account titled in the

name of the Estate, in order to have use of the

funds to pay debts, expenses, etc., or to facilitate

distribution. It should not be necessary to re-title

real estate or other assets, however, until the

property is actually distributed.

If property is held in the name of more

than one person, or is survivorship property —a

species of nonprobate asset discussed elsewhere in

this letter— then special care will have to be

taken. In the case of a bank account that is a

probate asset, it should be secured immediately, so

that no other person named on the account can

withdraw the funds. If the account is a

survivorship account, then it will not be an Estate

asset at all, but you are cautioned that whether the

account is effective as a survivorship account can

be a delicate legal question, and I should be

consulted before you take any action one way or

the other.

Nonprobate Assets. Nonprobate assets are

assets that pass on the death of a decedent to a

third party (other than the Estate), and which do

not pass under a Will or under the laws of intestate

succession. Typically, such assets pass in

accordance with a beneficiary designation under a

contractual arrangement. Death benefits under a

life insurance contract, IRA or retirement plan are

typical examples. Other examples include

survivorship bank, savings or brokerage accounts

and real property or stock where the property is

held by two persons as “joint tenants with right of

survivorship.” Often the nonprobate designation

will fail for obscure reasons of law, especially in

the case of bank and brokerage accounts.

Therefore, you should get my opinion about

whether any so-called nonprobate designation is

effective, or whether instead, the asset ought

properly to be considered an Estate asset. Assets

in a revocable or an irrevocable trust are

typically nonprobate assets.

Accounting For Life Insurance. The

proceeds of any insurance policies on

[theDecedent]’s life that are payable to anyone

other than the Estate should not be deposited in

the Estate's account since the proceeds belong

entirely to the named beneficiary. The proceeds of

any insurance policies on [theDecedent]'s life that

were formerly [theDecedent]’s separate property

and that are payable to you in your capacity as

[TitleOfExecutor] of the Estate belong entirely to

the Estate and, therefore, should be deposited in

the Estate's account. However, one-half of the

proceeds of any community property policies

belong to [NameOfSurvivingSpouse]; therefore, in

that instance only the remaining half of such

proceeds should be deposited in the Estate's

account.

Paying Estate Debts. The Estate's one-

half portion of all community debts outstanding at

the time of death should be paid from the Estate’s

bank account. Similarly, if there are continuing

community obligations, such as mortgage or

promissory note obligations, the Estate's one-half

portion of such obligations should be paid from

the Estate's bank account. Of course, the other

one-half of such continuing community

obligations, as well as one-half of all community

debts outstanding at the date of death, should be

paid by [NameOfSurvivingSpouse]. All of

[theDecedent]’s separate debts and continuing

separate obligations, as well as all funeral

expenses and administration expenses (such as

attorneys' fees, accountants' fees, etc.), should be

charged against the Estate. It should be pointed

out that, in order to maximize potential income tax

savings, it might be a good idea for you to consult

with us before making any withdrawals from the

Estate's bank account other than those discussed

above.

Duties of Executor. The following

information is set forth to summarize your duties

as [TitleOfExecutor] of [theDecedent]’s Estate

and to provide you with guidance in carrying out

your responsibilities.

Powers. As [TitleOfExecutor] of

[theDecedent]’s Estate, you have broad powers,

limited only by the Will and by the Texas Probate

Code. In such capacity, you are the Estate's

representative for the purposes of concluding

[theDecedent]’s affairs. This will involve the


A Panoply of Forms

11

collection of [theDecedent]’s assets (or

[theDecedent]’s one-half interest in community

assets), the payment of debts, the payment of the

Estate's administration expenses and death tax

liabilities, and the distribution of the remaining

assets to the beneficiaries named in the Will.

Due Dates. The first step in this process

was to have the Will admitted to probate. This

permitted the administration phase of the Estate to

begin and now requires completion of the matters

below. As will be discussed further below, many

of the following matters will be completed either

by us or by your CPA; however, your assistance

will be needed in order to gather the required

information. You should familiarize yourself with

the matters to be completed in the administration

process, as well as their respective filing

deadlines.

NOTICES

Mandatory Published Notice to General

Creditors. . . .

Notice to the State, a Governmental

Agency of the State or a Charitable

Organization. . . .

Copy of Notice to Creditors to be Filed

With Court. . . .

Mandatory Actual Notice to the

Comptroller. . . .

Permissive Notice. . . .

Mandatory Notice to Secured Creditors.

. . .

Memo Enclosed on Paying Debts. I am

enclosing a Memo entitled “Paying Debts,

Allowances And Taxes And Satisfying Gifts

Under The Will, a Guide to the Independent

Executor.” You may want to read this if there is

any question about the solvency of the estate.

Inventory Appraisement and List of

Claims. . . .

Federal Estate Tax. It is my

understanding that the value of [theDecedent]'s

gross estate (all of [theDecedent]'s separate

property plus one-half of the community property

plus the value of certain lifetime transfers) did not

exceed $ (or a lesser figure if taxable lifetime gifts

were made) on [DateOfDeath], a federal estate tax

return need not be filed and no estate taxes will be

imposed. Where no such taxes are due, no Texas

inheritance tax is due. If it is even remotely

possible that the estate might be larger than $

(or a lesser figure if taxable lifetime gifts were

made) on [DateOfDeath], please tell me

immediately, because in that case both a federal

estate tax and a state inheritance tax return

might be due nine months from date of death.

Final Income Tax Return (Form 1040).

The final federal income tax return (Form 1040),

covering the period beginning on January 1 and

ending [DateOfDeath], must be prepared and filed

on behalf of [theDecedent] if [theDecedent] had a

certain minimum amount of gross income. The

return must be filed and the income taxes that are

due must be paid on or before the normal income

tax return due date (April 15, _____). In addition,

the income tax return for the preceding year must

also be prepared and filed if it has not been filed

already.

As the administration progresses, we will

be in a better position to evaluate the need for the

return for [YearOfDeath]. To reiterate, the Form

1040 for [YearOfDeath] must be filed and the

taxes must be paid on or before April 15,

[YearIncomeTaxDue]. This return will include

the income from [theDecedent]’s separate

property and one-half interest in the income from

the community property for the period beginning

January 1, [YearOfDeath] and ending

[DateOfDeath]. At your and

[NameOfSurvivingSpouse]’s joint election, the

return may be filed as a joint tax return for

[NameOfSurvivingSpouse] and [theDecedent]. If

a joint return is filed, it will also include the

income from [NameOfSurvivingSpouse]’s

separate property for the entire year and

[Decedent’s] one-half interest in the income from

the community property through [DateOfDeath].

Of course, if an income tax return for

calendar year [YearIncomeTaxDue] was not filed

while [theDecedent] was alive, then it too will

have to be filed by you by the due date which

would have been applicable if death had not

intervened, which ordinarily would be April 15,

[YearOfDeath] absent an extension. I understand

that [theDecedent]'s final income tax return for

(the year preceding death) has already been


A Panoply of Forms

12

filed and the taxes paid. If I am wrong about

this, please let me know immediately.

Discharge of Representative. Texas law

permits a personal representative to receive a

judicial discharge under some circumstances. This

usually involves additional cost, and for that

reason and others many independent

administrations are simply never “formally”

closed. If you wish to be formally discharged by

the court, you must ask us to undertake this as an

additional obligation of the engagement.

***Fiduciary Income Tax Return (Form

1041). A decedent’s estate is a taxpayer for federal

income tax purposes. The IRS treats an estate as

coming into being at the decedent’s date of death,

rather than on the date the personal representative

qualifies or an estate administration is opened.

Therefore, the beginning date of the first year is

[DateOfDeath]. The fiscal year may end on the

last day of any month, provided that it does not

extend beyond one year from [DateOfDeath]. You

will need to determine the fiscal year for the

Estate as soon as possible. You should choose this

date after consulting with the accountant for the

Estate. Please let me know as soon as possible

what fiscal year is selected.

A fiduciary income tax return for income

of [theDecedent]'s Estate (Form 1041) will be

required in all years in which the gross income of

[theDecedent]'s Estate exceeds $600. The due date

for the estate income tax return is the 15th day of

the fourth month after the close of the fiscal year

of the Estate. The latest possible fiscal year end

is . Therefore, the latest possible date for the

filing of the Form 1041 is [LatestDueDate1041]. It may be advantageous to pick a short first fiscal

year, in order to pay income taxes at a lower

marginal rate.

If all of the untitled assets are delivered

into the possession of the beneficiaries, and title to

all other assets is transferred into the names of the

beneficiaries, before the Estate accumulates $600

in income, then you may be able to avoid the

obligation to file a return for the Estate. Even if

gross income exceeds $600, an estate receives a

distribution deduction for most distributions made

during the fiscal year. Therefore, it is very

possible that there will be no tax owing even

though as a technical matter a return is due.

Note that certain administration expenses,

fees (including attorney and accountant fees) and

expenses are deductible against the income of the

Estate, if any. If the Estate does not have income,

or if the income is carried out as a result of an

interim distribution for which the Estate received a

distributable net income deduction, the value of

the deduction could be lost. Generally, these types

of expenses can be carried over from year to year

as a net operating loss (NOL), but NOLs are not

carried out to the beneficiaries in the year of the

final distribution that closes the Estate, which

means that without careful planning, the deduction

will be lost. On the other hand, deductible

expenses that are incurred in the year that Estate is

closed are passed out and utilized among the

beneficiaries, and will not be lost. You should

keep the rudiments of these rules in mind in order

to get the most leverage out of the deductible

Estate expenses.

Form 2848. Since it may become

necessary for me to represent the estate before the

IRS, I previously had you sign an IRS Form 2848

Power of Attorney. A copy of that document is

enclosed.

***Responsibility for Filing Returns. As

the attorneys representing you in your capacity as

[TitleOfExecutor], we will handle all of the

Estate's probate matters, as well as any other legal

matters regarding the Estate. However, as a firm

policy, we do not normally prepare income tax

returns. Therefore, we recommend that you retain

a CPA to prepare any income tax returns, such as

the Estate's fiduciary income tax returns, as well

as the final individual income tax return for

[theDecedent]. Our records do not indicate that

you have chosen a CPA to help you with Estate

accounting matters. As soon as you have selected

a CPA, please let me know his or [him/her] name,

address and telephone number.

Insurance. If you have not already done

so, you should contact your insurance adviser in

order to be certain that there is continuing and

adequate fire, casualty and liability insurance

coverage with respect to all property comprising

the Estate, and insurance on all vehicles. This is

very important.

Distribution and Closing of Estate. After

all of [theDecedent]'s known debts and taxes and


A Panoply of Forms

13

the taxes and debts of the estate have been paid,

you may then distribute the remaining assets in

accordance with the provisions of the Will.

Protecting You as Executor. There is no

such thing as a “model” estate. Every estate has its

unique problems, and difficult decisions are often

associated with those problems. There are several

ways that we can protect you legitimately for the

actions you must take. It is extremely important

that you obtain a receipt for any assets you

distribute to a beneficiary. This receipt, which I

will prepare, should describe the assets in detail so

that you can prove what has been distributed, to

whom, and when. It also shows that the

beneficiary has accepted the asset from the Estate.

I am also enclosing Significant Date List.

a Significant Date List. The more important dates

are highlighted on the list. Please review the

Significant Date List and mark your calendar

accordingly. As a condition of my representation

as attorney, I must insist that you compare the

dates listed in this letter with the dates on the

Significant Date List, to make sure that they

correspond with one another, and that you further,

calculate these dates yourself to make sure that

they are accurate. If you come up with a different

date than I came up with, or if any date in this

letter does not correspond to the Significant Date

List, then you should call me immediately.

Calculating the correct due date is

extremely important, since both you and the Estate

could be damaged if the date is calculated

incorrectly. However, anyone who has to calculate

as many due dates as are involved in the

administration of an estate will make a mistake

sooner or later, if the process is repeated enough

times. This is the problem with which I am faced,

since I have to do this for many estates. My

solution is to calculate these dates separately (once

in this letter and once on the Significant Date List)

and then ask you to calculate them as well. My

theory is that if this is done, it is extremely

unlikely that the same mistake will be made three

times. This is my answer to the problem.

Executor’s Fees or Commissions. In the

absence of a will provision to the contrary, §241

of the Probate Code establishes the commissions

to which an executor is entitled in Texas.

However, if the Will sets forth a different amount

or formula, then the Will provision governs and

§241 does not apply.11

The rules governing compensation by an

executor are somewhat vague and uncertain. As

stated above, in the absence of a Will provision to

the contrary, §241 of the Probate Code establishes

the commissions to which an executor is entitled

in Texas. However, if the Will sets forth a

different amount or formula, then the Will

provision governs and §241 does not apply.

The Will has the following to say on the

subject of executor's commissions:

[WillProvForExecCom]

The Will provides that in addition to

being reasonable, compensation shall not exceed

the customary and prevailing rate. Unfortunately,

the “customary and prevailing rate” is not

something that is regularly published in the Wall

Street Journal or anywhere else, and it may not be

too far off to say that the “customary and

prevailing rate” varies. To help you determine

what corporate fiduciaries charge, I am enclosing

a collection of rate schedules that I started to

acquire a number of years ago from the local

banks. These schedules may be out of date by

now, and so I will try to obtain more current

schedules. When I do, I will send them to you.

Since this is an “Independent

Administration”, it is my opinion that you are

entitled to compensation under the terms of the

Will, rather than as specified by the statute,

although I have to tell you that I know of no cases

that directly address this question. The statutory

rate may, therefore, be relevant in determining

what is customary and reasonable; and so I will

discuss it here.

If the statutory rate is not reasonable,

clearly you are entitled under the Will to such

additional amount as the Will provides, provided

that it is necessary to make the compensation

reasonable. However, because the law is not clear,

we must ask whether the statutory rate is per se

reasonable, such that you could always rely that it

11 Stanley v. Henderson, 139 Tex. 160, 162 S.W.2d

95 (1942). Lipstreu v. Hagan, 571 S.W.2d 36,38 (Tex. Civ.

App.--San Antonio 1978, writ ref'd n.r.e.). Woodward and

Smith, Probate and Decedents' Estates, 18 TEXAS

PRACTICE (1971), §721.


A Panoply of Forms

14

was at least enough. I have been unable to locate a

case directly on this point, but my opinion, which

is apparently that of the Probate Judges in Tarrant

County, is that, while the statutory rate is always

available when the Will is silent —whether it is

reasonable or not— if the Will provides for

reasonable compensation, then the statutory rate is

relevant but not dispositive, which means that it

could result in a commission that is too high.

Basically, the Texas statutory scheme

(§241 of the Probate Code) —which may be only

one factor if the Will provides for an Independent

Administration or otherwise specifies the rate of

compensation— uses what we call the 5% in and

out method. Under this method fiduciaries are

“entitled to receive, and may retain in their hands,

a commission of five percent (5%) on all sums

they may actually receive in cash, and the same

percent on all sums they may actually pay out in

cash.”12

[Emphasis added.]

The following important modifications to

the 5% in and out rule are set forth in the statute

and should be noted by you.

No commission shall be allowed

for receiving funds belonging to the

testator or intestate which were on hand or

were held for the testator or intestate at the

time of his death in a financial institution

or a brokerage firm, including cash or a

cash equivalent held in a checking account,

savings account, certificate of deposit, or

money market account; nor for collecting

the proceeds of any life insurance policy;

nor for paying out cash to the heirs or

legatees as such; provided further,

however, that in no event shall the

executor or administrator be entitled in the

aggregate to more than five percent (5%)

of the gross fair market value of the estate

subject to administration. If the executor or

administrator manages a farm, ranch,

factory, or other business of the estate, or if

the compensation as calculated above is

unreasonably low, the court may allow him

reasonable compensation for his services,

including unusual effort to collect funds or

life insurance. For this purpose, the county

12 Tex. Prob. Code §241(a).

court shall have jurisdiction to receive,

consider, and act on applications from

independent executors.13

There are many problems in applying the

5% in and out rule in real life. A common issue is

determining the size of the commission on the sale

of mortgaged real estate. According to Woodward

and Smith:

In some instances where there were

no other assets from which a commission

could be paid, the administrator has

refused to tender a deed except on

condition that the mortgagee-purchaser pay

him the statutory commissions on the

amounts theoretically paid in and paid out

in the transaction. As an example, if the

mortgagee makes the high bid of $10,000,

a sum less than the amount of the debt, he

may credit the bid against the debt. The

representative is entitled to demand a

commission of five percent of the amount

of the bid, amounting to $500, as cash

received, and also five percent of $9,500,

as his commission on money paid out. In

other words, the transaction is treated as if

the mortgagee had actually paid in to the

administrator the amount of his bid, and

the administrator had paid out what

remained after retaining his commission.14

It has been held that fiduciaries are entitled

to a commission on amounts borrowed,15

and

amounts paid out for federal estate and state

inheritance taxes.16

The commission does not

apply to receipts and disbursements incurred in the

13 Tex. Prob. Code §241(a), as amended, effective

September 1, 1991.

14 Woodward and Smith, Probate and Decedents'

Estates, 18 TEXAS PRACTICE (1971), §721, p. 83-84.

Wolfe’s Estate v. Wolfe, 36 Tex. Civ. App. 168, 81 S.W. 90

(1904)

15 Von Koenneritz v. Ziller, 112 Tex. 126, 245 S.W.

423 (1922). Goodwin v. Downs, 280 S.W. 512, 514 (Com.

App. 1926).

16 Walling v. Hubbard, 389 S.W.2d 581 (Tex. Civ.

App.--Houston 1965, writ dism’d n.r.e.).


A Panoply of Forms

15

operation of a business held by the estate.17

However, the statute allows special compensation

for operating a business. Such special

compensation does not deprive the fiduciary of the

statutory commission on other transactions not

related to the operation of the business.18

No

commission is allowed for cash payments to the

beneficiaries.19

If there is more than one fiduciary, the

commission is the same as if there were only

one, and the fiduciaries should divide the

commissions equally.20

(Corporate fiduciaries are

often able to avoid this rule by providing in a fee

agreement, a contract, that fees will not be

shared.21

)

An amendment to the statute now requires

before receiving the commission, the court must

first specifically find that the fiduciary has “taken

care of and managed the estate in compliance with

the standards of this Code...”22

However, this rule

is thought not to apply to an independent

executor.23

Communication. To the extent that you

elect to handle matters directly, it is very

important for you to keep me advised and to

furnish me copies of all outgoing and incoming

correspondence and other documents.

Gathering of Information. The first thing

I need is to obtain a schedule of all of

[theDecedent]’s assets. I will need a list of all

17 Dwyer v. Kalteryer, 68 Tex. 554, 5 S.W. 75

(1887).

18 Walling v. Hubbard, 389 S.W.2d 581 (Tex. Civ.

App.--Houston 1965, writ dism’d n.r.e.).


20 Wright v. Wright, 304 S.W.2d 951 (Tex. Civ.

App.--Amarillo 1957, writ ref'd).

21 See Sewell & Nimmons, “The Executor's and

Administrator's Statutory Compensation in Texas,” 3 ST.

MARY'S L.J. 1, 5 n.20 (1971).


23 Woodward and Smith, Probate and Decedents'

Estates, 18 TEXAS PRACTICE (1971), §721, 1994

supplement p. 12. Hughes v. Mulanaz, 105 Tex. 576, 153

S.W.2d 299 (1913).

bank accounts, brokerage accounts, etc. A good

way to do this is to let me have a copy of the last

statement issued by the institution before

[DateOfDeath] and a copy of the first statement

issued by the institution after [DateOfDeath].

Next, I will need a copy of any deeds to any real

property in which [theDecedent] had an interest. I

will also need a copy of any other instruments of

title, e.g., automobile titles.

Court Documents. For your records, I am

enclosing copies of all documents that have not

yet been sent to you and will send you copies of

all future correspondence and other documents as

they are prepared.

Disclaimer. Note that under Texas and

Federal law a person may have the right to

“disclaim” a gift under a Will. A disclaimer may

be of only some of, or of all, the interest the

disclaimant has in the estate. The disclaimer must

generally be made within nine months of death

[NineMonthsOfDeath]. The disclaimer must meet

a number of specific legal requirements in order to

be effective. A disclaimant cannot direct where the

disclaimed property will go, nor may the

disclaimant have accepted the disclaimed property

or any of its benefits (e.g., the income from or use

of the property) prior to the disclaimer. Property

that is disclaimed will pass as if the disclaimant

predeceased the testator, unless the Will directs

otherwise. The reason that many people disclaim

assets is in order to effectively transfer assets to a

younger generation free of estate and gift tax.

Disclaimers can be tricky. For instance,

disclaiming an interest in a formula bequest can be

ambiguous; and disclaiming a specific asset that is

part of the residuary estate, especially where there

is more than one residuary beneficiary, can also be

problematic. The requirement that the income also

must be disclaimed can cause the disclaimer to fail

if it is not handled with extreme care, and there are

frequently issues involving the question of

whether or not the disclaimant has previously

accepted benefits of the disclaimed property,

which is yet another way the disclaimer can fail.

For these reasons and others, disclaiming property

is a technical matter that should not be attempted

without legal counsel.

Transfer of Title to Car and Home. A

frequently asked question is how does the


A Panoply of Forms

16

executor go about transferring title to the car and

the home. At some point during the administration

it may be necessary to transfer title to the home

and any vehicles listed in [theDecedent]’s name. If

the home has been left outright to a person under

the Will, the probate of the Will acts as a

document of conveyance, effective on the close of

the Estate. However, in this case and in others, it

is my general recommendation that a special

warranty deed be prepared conveying the property

from the Estate to the beneficiary. We will take

care of this for you at the appropriate time, should

you request.

In the case of a vehicle, you need to take

the car title, Application for Texas Certificate of

Title, and Odometer Statement, to a sub

courthouse. You should be able to obtain an

Application for Texas Certificate of Title and

Odometer Statement there. However, for your

added convenience we are enclosing for your

possible use an Application for Texas Certificate

of Title and Odometer Statement. Sign and

complete the title, Odometer Disclosure

Statement, and Application as the “transferor,”

indicating your capacity as independent executor.

You should be able to obtain an exemption from

the sales and use tax by filling in “bequest under

Will” in the blank provided in the Application.

There is a $10 fee. The forms are no longer

required to be notarized. It will be necessary to

bring along current Letters Testamentary to

present to the clerk. If there are any problems in

implementing this procedure, be sure and let me

know.

***Gain or Loss on Funding Gifts.

Unfortunately, when property other than cash is

distributed in satisfaction of a gift that is not a

specific gift, it will often be necessary to value the

entire estate available for distribution as of the

date of distribution. This can be necessary, for

example, if the distribution is in satisfaction of a

fractional share gift (e.g., a gift of a fraction of the

residuary estate), if some beneficiaries of the gift

nevertheless receive different assets than others

(i.e., a nonprorata distribution), as may or may not

be permitted under the governing instrument, or if

prorata distributions are not made at the same

time. If the distribution is in satisfaction of a

pecuniary gift (a gift expressed as a dollar

amount), it will be necessary to at least value the

property distributed, or, perhaps, to value the

entire estate, depending on whether the valuation

method for funding pecuniary gifts is specified as

being “fair market value on the date of

distribution” or “fairly representative of

appreciation or depreciation.” If a pecuniary gift is

to be satisfied with property other than cash at its

“fair market value on the date of distribution,” it

will usually be necessary to recognize capital gain

if the value of the property at the time of

distribution exceeds its basis for federal income

tax purposes; or, at least that is the probable IRS’

position.

Summary. By way of a partial summary,

let me point out that the administration of this

Estate is an essential and very important process.

It clears title to real estate. It settles legitimate

debts (and wipes out others). It establishes a new

tax basis for the property in the Estate as well as

for the community property interest of the

surviving spouse. It permits clear title distribution

of property to the persons entitled to receive it

under the terms of the Will. This letter is a general

guide that will help you keep abreast of many

matters necessary to complete the administration

of [theDecedent]’s Estate. Obviously, many

matters will come up which are not specifically

addressed in this letter. We will address questions

that you raise as to such other matters. We will

assist you in connection with the performance of

your duties as [TitleOfExecutor] of the Estate.

Further, we will probably need to communicate

with you on a fairly regular basis during the period

of administration.

Important Telephone Numbers. Please

contact me if you have any questions concerning

this letter, your duties, or the future procedures.

You should feel free to contact my secretary, xxx

at (817) 878-2944, to furnish additional

information or my para-legal, xxxx, at (817) 878-

6044 to ask routine questions. You may, of course,

contact me directly at (817) 877-2885.

Yours very truly,

Noel C. Ice

NCI/ice


A Panoply of Forms

17

Enclosures: Memorandum entitled

“Fiduciary Duties”

Letters Testamentary

Oath of [TitleOfExecutor]

IRS Form 56

Probate Significant Date List

Proof of Death and Other Facts

Order Admitting Will to Probate and

Appointing [NameofFirstExecutor]

as [TitleOfExecutor]

Application for Texas Certificate of Title

and Odometer Statement

Stamped, self-addressed return envelope

IRS Form 2848

IRS Forms SS-4

Table of Estate Planning and Probate

Documents

Memo “Paying Debts, Allowances And

Taxes And Satisfying Gifts Under The

Will A Guide To The Independent

Executor”

Memorandum entitled “Fiduciary Duties”

Memo, “The All Important IRC §645

Election to Treat a Revocable Trust Under

the Rules Applicable to Decedent's

Estates or

to Combine the Trust and the Estate.”

Article, “Grantor Trusts and Income Tax

Reporting Requirements: A Primer” by

Jonathan G. Blattmachr and Bridget J.

Crawford”

cc: [CC]

[CCC]


A Panoply of Forms

18

ARTICLE 3 MODEL LETTER TO CLIENT REGARDING

THE FORM 706 AND THE ISSUE OF

WHETHER TO TAKE THE §642(g) SWING

ITEMS ON THE ESTATE OR THE

FIDUCIARY INCOME TAX RETURN, AND

INCLUDING A DISCUSSION OF THE

§2204(a) AND THE §6905 ELECTIONS

PERSONAL AND CONFIDENTIAL

ATTORNEY CLIENT PRIVILEGED

[TOWHOM]

[HOME_STREET]

[HOME_CITY], [HOME_STATE]

[HOME_ZIP]

[PhoneBusMain] (Business)

[PhoneHomeMain] (Home)

[PhonesImptOther]

[FAX] (FAX)

[EMail]

[WESITE]

RE: Estate of

[DecedentFullName],

Deceased

[DecedentFullName],

Deceased

Probate Cause No.:

[ProbateCauseNo]


Dear [SALUTATION]:

The due date for the estate tax return is

[706DueDate].

Enclosed herewith is what may be the final

version of the Federal Estate Tax Return Form 706

and Texas Inheritance Tax Return. We have made

a few minor adjustments here and there from what

I sent you last, but none of the changes are

dramatic.

Transferor Liability, Discharge, Request

for Prompt Assessment, and Statutes of

Limitation. You should be advised that IRC24

24 All references herein to the "IRC" are to the

Internal Revenue Code of 1986, as amended, unless

otherwise indicated.

§3713 make an executor personally liable for

payments and distributions before taxes have been

paid. One way to assure that this does not become

an issue is to not make any distributions until all

of the appropriate statutes of limitation have run,

typically three years. (There is no limitation on the

assessment of tax (a) in “the case of a false or

fraudulent return with the intent to evade tax,”25

(b) in “case of a willful attempt in any manner to

defeat or evade tax,”26

or (c) in “the case of failure

to file a return.”27

Finally, there is a six year

statute in the case of a substantial omission from

the estate tax return.) Waiting for the statutes to

expire has the advantage of creating the least

disturbance with the IRS, but can also mean that

the beneficiaries would have to wait longer before

the estate can be closed and all of the assets more

safely distributed. The following is a discussion

about how the harshness of §3713 can be

mitigated.

Estate Tax, Gift Tax and Income Tax

Liability.28

There are three taxes for which you

could be personally liable, at least to the extent of

the value of assets included in the gross estate that

were or are under your control: (1) The first is the

estate tax. (2) The second is any gift tax that

[theDecedent] might have owed but were not paid

prior to death. (3) And the third is for any income

taxes that might have been owed by [theDecedent]

at or as of date of death. Until the time for audit or

reassessment expires on each of these taxes, you

may not know for sure just what the liability for

these items actually is.

In our case, we have a pretty good idea that

there is no liability, other than as has been and will

be reported; but as your lawyer, I am under an

obligation to point out these issues. I call your

attention to them because you may be under

pressure to distribute the assets of the estate prior

to expiration of the applicable limitation periods;

in which case, you could find yourself personally

25IRC §6501(c)(1).

26IRC §6501(c)(2).

27IRC §6501(c)(3).

28 This portion of the letter can easily be shortened,

depending on the sensitivity of the issue.


A Panoply of Forms

19

liable for the taxes without the assets to pay them

with (because you distributed them).

There are, however, a few techniques that

can give you some protection, and that may allow

you to make distributions to the other beneficiaries

earlier than otherwise. There are essentially three

elections that you can make: (1) one to discharge

you early for estate tax liability, (2) another to

release you for income and gift tax liability, and

(3) a third to actually promptly assess any income

taxes the [theDecedent] may have owed. Note that

the first two elections merely discharge you,

individually, for distributions made to the

beneficiaries out of the estate. If additional taxes

are later assessed, the IRS can still collect them

from the distributees. The third election, the one

for prompt assessment of income taxes under IRC

§6501(d), is broader.

Whether or not a request for prompt

assessment and/or for a discharge actually

increases the likelihood of audit is not easy to say.

Common sense and instinct argue that it would,

but the general experience (such as there is) casts

doubt on this conclusion. I think that the

likelihood of increased scrutiny is perhaps a little

greater in the case of asking for a prompt

assessment; that it is less still in the case of asking

for a discharge for gift and income tax liability,

and less still if you request a discharge for estate

taxes. I think it probably true that the more

elections you make, the greater the likelihood of

drawing the unwarranted attention of the IRS, so I

do not automatically recommend that you make all

three.

I am reluctant to ask for a prompt

assessment of income taxes, in the absence of

compelling reasons, but still think you should

consider it an option. However, I feel that the

other two elections offer less risk and more

benefit. Allow me to be more specific, by

addressing each of these two elections below.

Under IRC §2204(a) you are entitled to

discharge from personal liability for estate taxes,

and under IRC §6905 you can seek release from

liability for other taxes (e.g., income and gift

taxes). In both cases, the discharge must be issued

within 9 months from the request.

I recommend that these elections be

made, since it will allow you to safely make

distributions earlier than otherwise.

I am enclosing an original letter to the IRS,

transmitting the Form 706 and making the

§2204(a) and §6905 elections. In the event that

you want to make the §2204(a) and §6905

elections, please sign where indicated, and return

the letter to me, along with the signed Form 706

(assuming no changes in that document). If you

decide to make one election, but not the other,

then give me or _________ a call, and we will

send you a new letter, appropriately modified.

If you decide to make neither election, do

not sign or return the cover letter to the IRS, and I

will draft a new cover letter conveying the 706,

without reference to these elections. When you

receive a copy of the letter transmitting the 706 to

the IRS, you will be able to confirm that we either

did, or did not, make the election(s) you desire.

The elections can still be made, even after the 706

is filed, by the way.

If you decide to request a prompt

assessment of income taxes, you will have to let

me know, and we will have to prepare and you

will have to sign a Form 4810.

Form 2848. Enclosed is a Form 2848

Power of Attorney allowing me to represent you

before the IRS on estate tax issues. Please sign and

date this form where indicated if you want me to

be able to deal with the IRS on tax matters

affecting the estate, including any of the elections

described above, which I, of course, will not make

on my own, without your permission.

Review of Forms. Please review the Form

706 and Texas Inheritance Tax Return carefully,

and if they meet with your approval, you should

sign and date your signature where indicated on

the first page of each form.

Checks to the IRS and Texas Treasurer.

Next, you should write a check to the IRS and to

the State Treasurer. These checks should be drawn

on the estate’s checking account. The check to the

IRS should be for $asdfdsfsdf, and should be

made payable to Internal Revenue Service. Please

write on the check the decedent’s name, Social

Security No. and the words “Form 706.”


A Panoply of Forms

20

The check to the State Treasurer should be

for $wertwerwerwer, and should be made payable

to State Treasurer.

Valuation Of Oil and Gas Interests. We

have not attempted, nor are we qualified, to

definitively value the oil and gas interests in the

estate. The preferred method would be for you to

get an appraisal. However, one method commonly

used to value royalties is to come up with a recent

monthly average net payout (using, say, the last 36

months), and to capitalize it by multiplying the

number by some figure, between 24 and 60

representing a payout. The IRS typically uses 5

years, unless a different capitalization rate is

indicated.

We understand that the oil and gas

properties in the estate have produced, on average,

a net annual royalty equal to that listed in other

correspondence. If the value is way off, or if there

are special circumstances which would make a 3

year multiple inappropriate, and if the difference is

SIGNIFICANT, then let us know and we will

change it. We can go to a 5-year multiple if you

prefer. This will raise the level of the gross estate

somewhat, and will result in greater estate tax

owing.

The Texas Probate System, Second

Revised Edition, discusses this issue on

Worksheet 7 and Special Instruction 26, paragraph

no. 5. I made a form out of Worksheet 7, to

compute the mineral interest values.

Special Instruction 26, paragraph 5 reads:

5. In the absence of other relevant

evidence of value, determine the value of

producing mineral interests by

multiplying the amount of royalty income

received during the twelve months

immediately preceding decedent’s death by

three or the average monthly royalty by

thirty-six. This is a three-year payout.

Sometimes a two-, or four-, or even five-

year payout is more appropriate. See

Worksheet 7. Discounts should be

available four lifting risks (perhaps 33-

1/3% to 40%) followed by a further

discount for present value (say at “prime”

plus 1%).29

However, the truth is that I am aware of no

reliable published documents that tell us that the

IRS will accept either three or five times earnings.

It is just a rule of thumb, that in my experience the

IRS will often accept either, though they are said

to prefer a 5-year multiple when it generates more

tax.

Again, the value used on the inventory or 706

could be relevant in order to get a new basis for

depreciation purposes.

Changes. If there are any changes to

make, please call me so I may make them in time

to get the 706 signed by you and delivered to the

IRS before the due date. Also, please do not

hesitate to call if you have any questions.

***Whether to Deduct Administration

Expenses on the 706 or the 1041.

Expenses Deductible only on the 706.

Certain types of expenses may only be deducted

on the estate tax return, usually under IRC §2053.

These include funeral expenses and claims against

the estate representing personal expenses of the

decedent that are not deductible for income tax

purposes, federal gift and income taxes owed by

the decedent, or expenses that were incurred by

the decedent with respect to tax-exempt income.

Expenses Deductible on Both the 1041

and the 706. Deductions “in respect of a

decedent” may be taken on both the estate tax

return, Form 706, and the income tax return for

the estate, Form 1041. Deductions “in respect of a

decedent” are a narrow category that include

certain items there were accrued prior to death, but

on a cash basis of accounting were not properly

deductible on the decedent's personal income tax

return (Form 1040), items that would typically

have been deductible in years after death had the

decedent lived. These deductions commonly

include taxes and interest, and depletion and

investment expenses and are deductible against

29 N.B.: I know of no authority for this rule.

Apparently it is unwritten.


A Panoply of Forms

21

income taxes by virtue of §691(b) and against the

estate tax via §2053 as a debt of the estate.

Expenses Deductible on Either the 1041

or the 706, but Not Both. Prohibition against

Double Deductions. There are a number of

expenses that you may choose, in the exercise of

your discretion, to deduct on either the fiduciary

income tax return, Form 1041, or on the estate tax

return, Form 706. Another way to phrase the issue

is that an estate or trust will usually incur costs

and expenses that are properly deductible for

fiduciary income tax purposes but that are also

administrative expenses deductible on the estate

tax return.

These are sometimes referred to as §642(g)

swing items, because that section of the IRC

requires that these types of deductions can be

taken only once. The expenses that may be

deducted on either return (but not both) include,

among other things: executor’s commissions,

attorney and accounting fees and expenses

incurred in the administration of the estate, court

costs, filing fees, appraisal fees and costs,

expenses incurred in storing and maintaining

estate assets, travel expenses, and expenses in

connection with the necessary sale of estate

property, incident to settlement of the estate or

distribution of the trust.30

Sometimes interest

expenses fit in this category too, particularly

interest incurred on deferred payment of estate

taxes. Expenses relating to property in a living

trust are usually deductible for estate tax purposes,

if the trust property is included in the estate.31

Technically, the way the law works is that

§642(g) swing items are deductible for income tax

purposes only if the estate waives the right to take

them as estate tax deductions.32

The waiver is

made by filing a statement with the district

director. This can be done either as an attachment

to the income tax return or as a separate statement

“for association with the return.”

30 Treas. Reg. §§1.212-1(i) and 20.2053-3.

31See Steve Akers’ treatise on Post-Mortem Estate

Planning.

32 IRC §642(g).

It appears to be a common practice in those

cases where one is not sure of the best place to

take the deduction to take them on both returns,

adding a note that a waiver may be filed later.33

The regulations specifically allow claiming the

deduction on both returns as long as the estate tax

deduction has not been “finally allowed” at the

time the estate files the income tax waiver:

Amounts allowable under section

2053(a)(2) (relating to administration

expenses) or under section 2054 (relating

to losses during administration) as

deductions in computing the taxable estate

of a decedent are not allowed as

deductions in computing the taxable

income of the estate unless there is filed a

statement, in duplicate, to the effect that

the items have not been allowed as

deductions from the gross estate of the

decedent under section 2053 or 2054 and

that all rights to have such items allowed at

any time as deductions under section 2053

or 2054 are waived. The statement should

be filed with the return for the year for

which the items are claimed as deductions

or with the district director for the internal

revenue district in which the return was

filed, for association with the return. The

statement may be filed at any time

before the expiration of the statutory

period of limitation applicable to the

taxable year for which the deduction is

sought. Allowance of a deduction in

computing an estate's taxable income is

not precluded by claiming a deduction

in the estate tax return, so long as the

estate tax deduction is not finally

allowed and the statement is filed. However, after a statement is filed under

section 642(g) with respect to a particular

item or portion of an item, the item cannot

thereafter be allowed as a deduction for

33 See Zaritsky & Lane, Federal Income Taxation

of Estates and Trusts, ¶2.08[1][a]; Bittker & L. Lokken,

Federal Taxation of Income, Estates and Gifts ¶ 81.2.6

(Warren, Gorham & Lamont, 2d ed. 1992); R. Stephens, G.

Maxfield, S. Lind & D. Calfee, Federal Estates and Gifts

Taxation ¶ 5.03[3][d] (Warren, Gorham & Lamont, 6th ed.

1992).


A Panoply of Forms

22

estate tax purposes since the waiver

operates as a relinquishment of the right to

have the deduction allowed at any time

under section 2053 or 2054. [Emphasis

added.]34

The estate tax deduction will be considered

to have been finally allowed on the issuance of a

closing letter, the execution of a closing

agreement, or the expiration of the statute of

limitations on the estate tax return, whichever first

occurs. But “[t]he statement [associated with the

1041] may be filed at any time before the

expiration of the statutory period of limitation

applicable to the taxable year for which the

deduction is sought.” So, presumably, it is the

earlier of these two dates that fixes the issue. As a

practical matter, this may mean that the waiver is

effective as long as the statute of limitations has

not run on the estate tax return, prompting some

fiduciaries to claim the deduction on both returns,

and file the waiver just before the expiration of the

period for assessing an estate tax deficiency.

Estate Transmission and Estate

Management Expenses. A similar issue to the

one just discussed is whether to take an estate tax

deduction for estate transmission and estate

management expenses, or whether such expenses

will be deducted on the probate estate's federal

income tax return, or deducted in part on each.

However, here, if estate transmission expenses

(expenses that would not have been incurred but for

the decedent’s death, such as executor commissions

and attorney fees) are NOT taken on the Form 706,

the marital deduction will be reduced

commensurately, which in turn will necessitate a

commensurate reduction in the amount passing to

the bypass trust, and so the decision not to take a

706 deduction is not as clear cut. On the other

hand, estate management expenses (investment

advisory fees, stock brokerage commissions, custodial

fees and interest) may be deducted for estate

income tax purposes on the Form 1041 without

reducing the marital deduction, and that is the

place where we invariably recommend they be

taken.

* * * *

34 Treas. Reg. §1.642(g)-1.

We elected to deduct the §642(g) items on

the Form 706, Estate Tax Return. As indicated

above, this does not preclude you from taking the

same deduction on the Form 1041, Income Tax

Return; however, in that case, we would

eventually need to waive the right to take the

deductions on the estate tax return, and we would

need to recompute the estate tax and take other

measures to correct the record.

As indicated above, your accountant may

want to take the §642(g) deductions on the Form

1041, even though we have also taken the

deduction on the Form 706. This is permissible,

but it does mean that either (a) the 1041 will have

to be amended at some point to delete the

deductions, or (b) you will need to file a waiver of

the right to claim the deductions on the 706. If a

waiver is filed, then the estate tax will need to be

recomputed accordingly. I would hope that if a

waiver is going to be filed, that you would discuss

the matter with me first.

If a deduction is taken on both the 706 and

the 1041, as current practice generally favors

initially, then a waiver should be filed before the

statute of limitations runs on the estate tax return.

Because the waiver is made by filing a statement

with the district director, either as an attachment to

the income tax return on which the deductions are

claimed, or as a separate statement “for

association with the return,” I will leave the

responsibility for this filing (of the waiver) to

you and your accountant. I would appreciate it if

you inform me before filing it, however, and

encourage you to wait to file it as long as possible,

in order to leave our options open.

Communication With C.P.A. Preparing

the Form 1041. Although we have prepared the

Estate Tax Return, as I have mentioned to you

before, I expect that you will retain a C.P.A. to

prepare any income tax returns associated with the

estate or related trusts. In this regard, there are

two matters that I strongly urge you to ask

your accountant to consider: (1) The first is

whether or not a §645 Election should be made

to treat [TrustName] and the estate as a single

taxpayer for income tax purposes. (2) The

second is whether to deduct the §642(g)

expenses described above on the income tax

return. I am, of course, available for consultation

with your accountant regarding this question;


A Panoply of Forms

23

however, since I believe it is important to

document “who is doing what,” I want to

emphasize just what it is that we are undertaking

to do, and what we expect that you and your

accountant will be doing.

* * * *

If the enclosures that require your

signatures meet with your approval and are

accurate as far as you known, then please return

those enclosures to me as soon as you have signed

them and I will see to it that they are properly filed

with the IRS and the Texas Comptroller. For this

purpose I am enclosing a stamped, self addressed

return envelope.

Yours very truly,

Noel C. Ice

NCI/ice

Enclosures: Federal Estate Tax Return Form

706

Form 2848 Power of Attorney

Texas Inheritance Tax Return

Stamped, Self-Addressed, Return

Envelope

Cover Letter to the IRS

cc: [CC]

[CCC]


A Panoply of Forms

24

ARTICLE 4 MEMO TO CLIENT REGARDING THE IRC

§645 ELECTION

WHERE DECEDENT DIED AFTER

DECEMBER 23, 2002

Estate of [DecedentFullName], Deceased

Probate Cause No.: [ProbateCauseNo]


The All Important IRC §645 Election to Treat

a Revocable Trust Under the Rules Applicable

to Decedents’ Estates or to Combine the Trust

and the Estate

The following memo incorporates principles

found in the final regulations under IRC §645

applicable to decedents dying on or after

December 24, 2002. These rules were fairly new,

even before the advent of the final regulations, and

probate lawyers are still trying to come to terms

with them. Although, in principle, §645 was meant

to simplify life by putting revocable trusts on a par

with fully administered probate estates, the

breadth of the final regulations is so extensive that

I fear any attempt to offer a simple (or simplistic)

explanation of how they operate might overlook

something that could later turn out to be

important. For that reason, and because I, and

other probate lawyers, are still trying to come to

terms with the new rules, I offer the following

relatively comprehensive explanation, at the risk

of overkill.

4.1 THE “§645 ELECTION” IN

GENERAL.

If a “grantor” trust is a “Qualified Revocable

Trust” (a QRT), the trust and the estate can be

merged, in effect, for certain income tax reporting

purposes. The grantor trusts for which this election

can be made are called QRTs, which stands for

“Qualified Revocable Trusts.” [TrustName] was a

grantor trust and may very well qualify as a QRT.

In order to qualify for this special treatment, a

“§645 Election” must be made. Once made, the

election is irrevocable.35

If [TrustName] qualifies as a QRT, I would

seriously consider making the election, unless

your accountant has some good reason why not to.

35 IRC §645(c); Treas. Reg. §1.645-1(e)(1).

It is my tentative opinion that [TrustName] was

a QRT, and I recommend that your accountant

make the §645 Election. However, before

passing on this issue in a manner on which you

can rely, we will have to talk further. For

instance, if [theDecedent] was incapacitated at

date of death, the trust may or may not be a

QRT, depending on the facts.

I quote from the regulations and the statute freely

below, mainly because I expect that your C.P.A.

will be preparing the income tax returns for the

estate/trust, and want to call attention to where the

law on the subject is to be found.

4.2 THE STATUTE ITSELF.

The statute itself is always a good place to start.

IRC36

§645 provides:

§ 645 Certain revocable trusts treated as

part of estate.

(a) General rule. For purposes of

this subtitle, if both the executor (if

any) of an estate and the trustee of

a qualified revocable trust elect the

treatment provided in this section,

such trust shall be treated and taxed

as part of such estate (and not as a

separate trust) for all taxable years

of the estate ending after the date of

the decedent's death and before the

applicable date.

(b) Definitions. For purposes of

subsection (a)—

(1) Qualified revocable

trust. The term “qualified

revocable trust” means any

trust (or portion thereof)

which was treated under

section 676 as owned by the

decedent of the estate

referred to in subsection (a)

by reason of a power in the

36 All references herein to the “IRC” are to the




A Panoply of Forms

25

grantor (determined without

regard to section 672(e)37

).

(2) Applicable date. The

term “applicable date”

means—

(A) if no return

of tax

imposed by

chapter 11 is

required to

be filed, the

date which is

2 years after

the date of

the

decedent's

death, and

(B) if such a

return is

required to

be filed, the

date which is

6 months

after the date

of the final

determinatio

n of the

liability for

tax imposed

by chapter

11.

(c) Election. The election

under subsection (a) shall

be made not later than the

time prescribed for filing

the return of tax imposed by

this chapter for the first

taxable year of the estate

(determined with regard to

extensions) and, once made,

shall be irrevocable.

37 N.B.: This is the statute that treats powers held by

a grantor’s trust as held by the grantor.

4.3 WHAT IS A QRT?

A “qualified revocable trust” or QRT is a certain

type of “grantor trust.” A grantor trust is a trust

that is recognized for state law purposes, but

which is ignored for tax purposes, during the

lifetime of the grantor, such that the assets of the

trust are treated as the property of (owned by) the

grantor, and any income, gains, losses, or other tax

related activity involving the trust assets are,

accordingly, taxed to the grantor, as if the trust did

not exist. Even though a trust is a grantor trust, it

may or may not, as a formality, have to file a tax

return. If it does file a tax return, the return merely

itemizes the activity inside the trust, and the

income, gain and loss is picked up on the grantor’s

1040.

Not all grantor trusts qualify as QRTs. For one

thing, to be a QRT the grantor must have retained

the power to revoke the trust at date of death (with

some limited exceptions).38

The Preamble to the final regulations has this to

say on the subject:

A trust that was treated as owned by the

decedent under section 676 [the power to

revoke] by reason of a power that was

exercisable by the decedent with the

consent or approval of a nonadverse party

is a QRT. The final regulations . . . clarify

that while a trust, in which the power to

revoke is held only by the decedent's

spouse and not by the decedent, is not a

QRT, a trust, in which the power to revoke

is exercisable by the decedent with the

approval or consent of the decedent's

spouse, is a QRT.

Clarification has . . . been requested

regarding whether a trust qualifies as a

QRT if the grantor's power to revoke the

trust lapses prior to the grantor's death as a

result of the grantor's incapacity. Some

trust documents for revocable trusts

provide that the trustee is to disregard the

instructions of the grantor to revoke the

38 Treas. Reg. §1.645-1(b)(1).


A Panoply of Forms

26

trust if the grantor is incapacitated.39

The

IRS and the Treasury Department

believe that, if an agent or legal

representative of the grantor can revoke

the trust under state law during the

grantor's incapacity, the trust will

qualify as a QRT, even if the grantor is

incapacitated on the date of the

grantor's death.

4.4 EFFECTIVE DATE OF FINAL

REGULATIONS.

Final regulations governing the §645 Election are

effective for decedents dying after December 24,

2002. Rev Proc 98-13, 1998-1 CB 370, and Notice

2001-26, 2001-13 IRB 942, which used to govern

the area, are both obsolete as of 12/24/2002. Prior

to 8/5/1997 the law did not permit this one-

taxpayer treatment. The following is taken from

the Headnote to the Preamble of the final

regulations:

IRS issued final regulations explaining

Code Sec. 645; election to treat certain

revocable trusts as part of estate for

income tax purposes: regulations clarify

and provide more flexible definition of

what constitutes QRT for Code Sec. 645;

purposes, and expand definition to include

certain foreign trusts and related estates.

IRS notes however that Code Sec. 6048;

information reporting is still required with

respect to such foreign trusts irrespective

of Code Sec. 645; election. Regulations

also establish Code Sec. 645; election

procedures and applicable election period;

clarify various issues surrounding TIN and

filing requirements; and clarify grantor

trust reporting rules under Code Sec. 671;

Rev Proc 98-13, 1998-1 CB 370, and

Notice 2001-26, 2001-13 IRB 942, are

both obsolete as of 12/24/2002.

39 N.B.: This is most curious, because it is circular.

I don’t know what it means. No matter what the document

says, a grantor who was incapacitated (i.e., lacked the legal

“capacity” to revoke the trust), could not revoke it. Also, it is

likely that most everyone, in the millisecond before death,

will be incapacitated. Further, it may be expected that the

incapacity will be longer than a millisecond in most cases.

4.5 WHAT ARE SOME OF THE

DIFFERENT TAX RULES APPLICABLE TO

TRUSTS AND ESTATES, IN THE ABSENCE

OF A §645 ELECTION? / REASONS FOR

MAKING THE §645 ELECTION?

If an administration is opened and an executor

appointed, the electing trust is treated, during the

election period, as part of the related estate for all

federal income tax purposes.

Although there are not an overwhelming number

of tax differences in the treatment of a probate

estate and trust, there are a few. A QRT is treated

as part of the related estate for purposes of the IRC

§642(c)(2) charitable set-aside deduction, for

example, but a post-death revocable trust is

allowed a charitable deduction only for amounts

paid to charities. Another difference is that the

IRC §1361(b)(1) subchapter S shareholder

requirements are not the same for estates and

trusts. The IRC §469(i)(4) special offset for rental

real estate activities also differs somewhat. The

active participation requirement under the passive

loss rules is waived for two years after the owner's

death in the case of estates, but not in the case of

revocable trusts.40

Finally, although trusts are

required to pay estimated income tax payments in

the same manner as individuals, estates are


taxable years.41

Presumably a QRT would also be

entitled to this benefit.

What are some of the reasons why you might want

to make the §645 election, other than

convenience? There are not very many. Here are a

few, which could be important, and which may be

largely a restatement of the preceding paragraph,

but stated differently:

Estates are allowed a charitable deduction for

amounts permanently set aside for charitable

purposes while post-death revocable trusts are

allowed a charitable deduction only for

amounts paid to charities.

40 Treas. Reg. §1.645-1(e)(2)(i).

41 IRC §6654(l).


A Panoply of Forms

27

The active participation requirement under the

passive loss rules is waived in the case of

estates (but not revocable trusts) for two years

after the owner's death.

Estates can qualify for amortization of

reforestation expenditures, while trusts do not.

A revocable trust usually is forced to choose a

calendar year as its tax reporting year, while

an estate (under §645 or otherwise) can choose

a fiscal year end other than December 31.

An estate does not have to make quarterly

estimated income tax payments for two years,

but a trust does.

4.6 WHEN MUST THE §645 ELECTION

BE MADE?

According to the Preamble to the final regulations:

[F]or the election to be valid, the election

form must be filed not later than the

time prescribed under section 6072 for

filing the Form 1041 [including

extensions, apparently] for the first taxable

year of the combined electing trust and

related estate, if there is an executor, or of

the first taxable year of the electing trust, if

there is no executor (regardless of whether

there is sufficient income to require the

filing of that return).

4.7 HOW IS THE §645 ELECTION

MADE?

The IRS has stated that it intends to issue a form,

Form 8855, for this purpose.

(i) Time and manner for filing the

election. If there is an executor of the

related estate, the trustees of each QRT

joining in the election and the executor of

the related estate make an election under

section 645 and this section to treat each

QRT joining in the election as part of the

related estate for purposes of subtitle A of

the Internal Revenue Code by filing a form

provided by the IRS for making the

election (election form) properly

completed and signed under penalties of

perjury, or in any other manner prescribed

after December 24, 2002 by forms

provided by the Internal Revenue Service

(IRS), or by other published guidance for

making the election. For the election to be

valid, the election form must be filed not

later than the time prescribed under section

6072 for filing the Form 1041 for the first

taxable year of the related estate

(regardless of whether there is sufficient

income to require the filing of that return).

If an extension is granted for the filing of

the Form 1041 for the first taxable year of

the related estate, the election form will be

timely filed if it is filed by the time

prescribed for filing the Form 1041

including the extension granted with

respect to the Form 1041.42

4.8 HOW LONG DOES THE ELECTION

REMAIN IN EFFECT?

Generally, the election terminates one day prior to

the “Applicable Date.”

[T]he final regulations provide that the

applicable date is the day that is the later of

2 years after the date of the decedent's

death or 6 months after the date of final

determination of liability for estate tax.

* * * *

While the final regulations retain the

issuance of the closing letter as one of the

triggers for the date of the final

determination of liability, the final

regulations have been changed to provide a

minimum election period of two years for

all electing trusts and related estates and,

as well as to provide that if the issuance of

the closing letter triggers the date of the

final determination of liability, the date of

the final determination of liability is the

date that is 6 months after the date the

closing letter is issued, rather than the date

the closing letter is issued as provided in

the proposed regulations.

* * * *

[T]he final regulations provide that the

election period terminates on the earlier of

the day on which both the electing trust

and related estate, if any, have distributed

42 Treas. Reg. §1.645-1(c)(1)(i). Other conditions

are listed in Treas. Reg. §1.645-1(c)(1)(ii).


A Panoply of Forms

28

all of their assets, or the day before the

applicable date. The final regulations

continue to provide that the election

does not apply to successor trusts (trusts

which are distributees under the trust

instrument). 43

4.9 SPECIAL TIN RULES.

4.9(a) TIN for the QRT or TINs for

Multiple QRTs.

According to the final regulations a

separate TIN is always required for the

QRT, even if an election is not going to

be made. However, if the QRT is

unfunded, it seems to me that if the §645

election is not made, then there should be

no need to get a TIN, unless and until the

QRT is funded. Also, it is possible that

there could be multiple QRTs, and the

regulations seem to imply that each one

needs a separate TIN.

Note that if the election is made “the

trustee is not required to file a Form 1041

for the short taxable year of the QRT

beginning with the decedent's date of death

and ending December 31 of that year.”44

Of course, in that case the “the payors of

the electing trust must be furnished with

the TIN obtained by the trust to file as an

estate.”45

The following is taken directly

from the regulations:

Regardless of whether or not there

is an executor, the final regulations

retain the requirement that a Form

1041 (including the items of

income, deduction, and credit of

the QRT) must be filed for the

short taxable year of the QRT

beginning with the decedent's date

of death if a section 645 election

will not be made for the trust, or if

the trustee and the executor are

43 Final Treas. Reg. §1.645, Preamble: Treasury

Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048.





uncertain whether a section 645

election will be made for the QRT

by the due date of the Form 1041

for the short taxable year of the

QRT beginning after the decedent's

death and ending December 31 of

that year.

* * * *

If there is an executor and the

electing trust terminates on or

before the termination of the

section 645 election period, the

trustee must file a final Form 1041

under the name and TIN of the

electing trust to notify the IRS that

the trust no longer exists. This

Form 1041 will not include any of

the trust's items of income,

deduction, and credit because those

items will be included on the Form

1041 filed for the combined

electing trust and related estate.

If there is an executor, the trustee

may not need to obtain a TIN for

the new trust deemed to have been

created upon the termination of the

election period. The trustee must

consult the instructions to the Form

1041 upon the termination of the

election period to determine if a

new TIN must be obtained. If a

new TIN is not required to be

obtained, the trustee must file

Forms 1041 for the new trust under

the TIN obtained by the trustee

under § 301.6109-1(a)(3) for the

QRT following the death of the

decedent. If there is no executor,

the trustee must obtain a TIN for

the new trust deemed to have been

created upon the termination of the

election period. If a new TIN is

required under the regulations or

the instructions to the Form 1041,

the trustee must file Forms W-9

with the payors of the trust to

provide them with the TIN to be

used following the termination of

the election period.


A Panoply of Forms

29

* * * *

The final regulations under

§1.6072-1(a)(2) are revised to

provide that the due date for the

Form 1041 filed for the taxable

year ending with the decedent's

death is the fifteenth day of the

fourth month following the close of

the 12-month period that began

with the first day of the decedent's

last taxable year.

* * * *

Section 301.6109-1(a)(3) is

intended to clarify that a trust

must obtain a new TIN after the

death of the decedent, if a trust

that was treated as owned by the

decedent during the decedent's life

will continue for a period of time

following the death of the decedent

to allow a winding up of the affairs

of the trust following the death of

the decedent.46

[Emphasis added.]

* * * *

(1) Obtaining a TIN. Regardless

of whether there is an executor for

a related estate and regardless of

whether a section 645 election will

be made for the QRT, a TIN must

be obtained for the [each] QRT

following the death of the

decedent. See §301.6109-1(a)(3)

of this chapter. The trustee must

furnish this TIN to the payors of

the QRT. See §301.6109-1(a)(5) of

this chapter for the definition of

payor.47

4.9(b) TIN for the Estate.

My preliminary opinion is that if an

estate administration is opened, a TIN


Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048. If

the trust was unfunded during life, and will essentially

terminate at death, except perhaps as a conduit to other trusts

or outright to the beneficiaries, then it is not clear to me that

a new TIN must be obtained or not.

47 Treas. Reg. §1.645-1(d)(1).

for the estate is also required, as well as

a TIN for each QRT. Again, I quote the

regulations:

(ii) Filing requirements—

(A) Filing the Form 1041 for the

combined electing trust and

related estate during the election

period. If there is an executor, the

executor files a single income tax

return annually (assuming a return

is required under section 6012)

under the name and TIN of the

related estate for the combined

electing trust and the related

estate. Information regarding the

name and TIN of each electing

trust must be provided on the

Form 1041 as required by the

instructions to that form. The

period of limitations provided in

section 6501 for assessments with

respect to an electing trust and the

related estate starts with the filing

of the return required under this

paragraph. Except as required

under the separate share rules of

section 663(c), for purposes of

filing the Form 1041 under this

paragraph and computing the tax,

the items of income, deduction, and

credit of the electing trust and

related estate are combined. One

personal exemption in the amount

of $600 is permitted under section

642(b), and the tax is computed

under section 1(e), taking into

account section 1(h), for the

combined taxable income.

(B) Filing a Form 1041 for the

electing trust is not required.

Except for any final Form 1041

required to be filed under

paragraph (h)(2)(i)(B) of this

section, if there is an executor,

the trustee of the electing trust

does not file a Form 1041 for the


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30

electing trust during the election

period. . . . 48

4.10 APPLICATION OF THE SEPARATE

SHARE RULES.

Although items of income, deduction, and credit

of a QRT and related estate are combined for

purposes of computing the tax, IRC §663(c)

separate share rules may provide an exception to

this general rule.49

The separate share rule is an income tax notion

which determines who picks up the income earned

by the estate or QRT when distributions are made.

Whether a §645 election is made or not, the estate

or any trust that makes a distribution during the

year will be entitled to a distribution deduction for

its distributable net income (DNI). This deduction

is offset by the fact that the beneficiary/recipient

of the DNI picks up the income, and the estate or

distributing trust should prepare and send a Form

1099 to the recipient of the DNI. Since there may

be more than one beneficiary, and since

distributions may not be made proportionately

among them in accordance with their interests,

there are rules, called the “separate share” rules

that determine how and under what circumstances

the income is to be apportioned. If it is not

apportioned fairly, there may be a need to make an

“equitable adjustment” so that one beneficiary is

not stuck with all of the taxable income, while

another otherwise similarly situated beneficiary

gets tax-free income. These rules are too

complicated to discuss in detail here. This is

largely a matter that your accountant can help you

with, if the issue becomes relevant; and, in that

regard, I am, of course, available to consult with in

a difficult case.

For present purposes, and to aid (perhaps) your

income tax preparer, I quote below a portion of the

new regulations on the subject.

(iii) Application of the separate share

rules—

(A) Distributions to beneficiaries

(other than to a share (or shares)

48 Treas. Reg. §1.645-1(e)(2)(ii)(A)&(B).

49 Treas. Reg. §1.645-1(e)(2)(ii)(A).

of the combined electing trust

and related estate). Under the

separate share rules of section

663(c), the electing trust and

related estate are treated as

separate shares for purposes of

computing distributable net

income (DNI) and applying the

distribution provisions of sections

661 and 662. Further, the electing

trust share or the related estate

share may each contain two or

more shares. Thus, if during the

taxable year, a distribution is

made by the electing trust or the

related estate, the DNI of the

share making the distribution

must be determined and the

distribution provisions of sections

661 and 662 must be applied

using the separately determined

DNI applicable to the

distributing share.

(B) Adjustments to the DNI of

the separate shares for

distributions between shares to

which sections 661 and 662 would

apply. A distribution from one

share to another share to which

sections 661 and 662 would apply

if made to a beneficiary other than

another share of the combined

electing trust and related estate

affects the computation of the DNI

of the share making the distribution

and the share receiving the

distribution. The share making the

distribution reduces its DNI by the

amount of the distribution

deduction that it would be entitled

to under section 661 (determined

without regard to section 661(c)),

had the distribution been made to

another beneficiary, and, solely for

purposes of calculating DNI, the

share receiving the distribution

increases its gross income by the

same amount. The distribution has

the same character in the hands of

the recipient share as in the hands


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31

of the distributing share. The

following example illustrates the

provisions of this paragraph

(e)(2)(iii)(B):

Example. (i) A's will

provides that, after the

payment of debts, expenses,

and taxes, the residue of

A's estate is to be

distributed to Trust, an

electing trust. The sole

beneficiary of Trust is C.

The estate share has

$15,000 of gross income,

$5,000 of deductions, and

$10,000 of taxable income

and DNI for the taxable

year based on the assets

held in A's estate. During

the taxable year, A's estate

distributes $15,000 to Trust.

The distribution reduces the

DNI of the estate share by

$10,000.50

(ii) For the same taxable

year, the trust share has

$25,000 of gross income

and $5,000 of deductions.

None of the modifications

provided for under section

643(a) apply. In calculating

the DNI for the trust share,

the gross income of the trust

share is increased by

$10,000, the amount of the

reduction in the DNI of the

estate share as a result of

the distribution to Trust.

Thus, solely for purposes of

calculating DNI, the trust

share has gross income of

$35,000, and taxable

income of $30,000.

Therefore, the trust share

50 N.B.: But since both the estate and trust are

reporting on the same 1041, I am not sure exactly what

obvious differences this will make.

has $30,000 of DNI for the

taxable year.51

(iii) During the same

taxable year, Trust

distributes $35,000 to C.52

The distribution deduction

reported on the Form 1041

filed for A's estate and Trust

is $30,000. As a result of

the distribution by Trust to

C, C must include $30,000

in gross income for the

taxable year. The gross

income reported on the

Form 1041 filed for A's

estate and Trust is

$40,000.53

51 Ditto. Or id.

52 N.B.: Here I can see where it would make a

difference, because C is not reporting his taxes on the same

return as the combined estate/QRT.

53 Treas. Reg. §1.645-1(e)(2)(iii).


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32

ARTICLE 5 MEMO TO CLIENT REGARDING THE IRC

§645 ELECTION

WHERE DECEDENT DIED BEFORE

DECEMBER 24, 2002

Estate of [DecedentFullName], Deceased

Probate Cause No.: [ProbateCauseNo]


The All Important IRC §645 Election to Treat

a Revocable Trust Under the Rules Applicable

to Decedents Estates or to Combine the Trust

and the Estate

The §645 election is a fairly new procedure. Until

late December of last year, we had only proposed

regulations and a Revenue Procedure, and the two

did not always agree with one another, which

made the whole area very complex, in addition to

being very new. We now have final regulations,

which are likewise challenging to comprehend in

all their breadth, but which do not apply in our

case, and are thus only mildly helpful.

This memo incorporates the principles applicable

to decedents dying BEFORE December 24, 2002.

The Preamble to the final regulations provides

that-

Estates and trusts of decedents dying

before December 24, 2002 may follow the

election procedures provided in the

proposed regulations or Rev. Proc. 98-13.

With respect to obtaining a TIN for a

QRT and filing a Form 1041 for the

short taxable year beginning with the

decedent's death and ending December

31 of that year, estates and trusts of

decedents dying before December 24,

2002 may follow the procedures in these

final regulations, the proposed

regulations, or Rev. Proc. 98-13.

5.1 THE “§645 ELECTION” IN

GENERAL.

If a “grantor” trust is a “Qualified Revocable

Trust” (a QRT), the trust and the estate can be

merged, in effect, for certain income tax reporting

purposes. The grantor trusts for which this election

can be made are called QRTs, which stands for

“Qualified Revocable Trusts.”

Since [theDecedent] was the “grantor” of a

revocable living trust, that trust may very well

qualify as a QRT. In order to qualify for this

special treatment, a “§645 Election” must be

made. Once made, the election is irrevocable.54

If

[TrustName] qualifies as a QRT, I recommend

that the election be made, unless your accountant

has some good reason why not to.

Because the trust was a revocable trust, it was not

treated as a separate taxpayer so long as

[theDecedent] was alive; rather, the trust was

ignored for tax purposes, and the assets of the trust

were treated as if they belonged to [theDecedent].

On [theDecedent]'s death, the trust became

irrevocable, and historically would become a

separate taxpayer. This would mean that there

would be two Fiduciary Income Tax Returns

which would need to be filed for a while, a return

for the probate estate, and a return for the trust.

Since the trust is the recipient of the bulk of the

estate, it may be more convenient to combine the

two for tax reporting purposes. IRC55

§64556

now

gives the executor and trustee of a qualified

revocable trust the right “to elect to treat trust as

part of estate, and not separate trust for all tax

years of estate ending after decedent's death and

before ‘applicable date’ as defined by Code Sec.

646(b)(2). This election is irrevocable and must be

made not later than filing date for return for

estate's first tax year.”57

However, “[i]f a Form

1041 reporting the items of the trust has already

been filed for the trust for its taxable year ending

after the date of the decedent's death without a

copy of the required statement attached to the

form, then the trust must file an amended Form

54 IRC §645(c).

55 All references herein to the “IRC” are to the



56 IRC §645 was previously §646, which can cause

confusion if you are reading references to it written before

the IRS Restructuring and Reform Act of 1998.

57 Rev. Proc. 98-13, 1998-1 CB 370.


A Panoply of Forms

33

1041 and attach a copy of the required statement

to the amended form.”58

If [TrustName] qualifies as a QRT, I would

seriously consider making the election, unless

your accountant has some good reason why not to.

I quote from the statute, the proposed regulations

and applicable Revenue Procedures freely below,

mainly because I expect that your C.P.A. will be

preparing the income tax returns for the

estate/trust, and want to call attention to where the

law on the subject is to be found.

5.2 THE STATUTE ITSELF.

The statute itself is always a good place to start.

IRC §645 provides:

§ 645 Certain revocable trusts treated as

part of estate.

(a) General rule. For purposes of

this subtitle, if both the executor (if

any) of an estate and the trustee of

a qualified revocable trust elect the

treatment provided in this section,

such trust shall be treated and taxed

as part of such estate (and not as a

separate trust) for all taxable years

of the estate ending after the date of

the decedent's death and before the

applicable date.

(b) Definitions. For purposes of

subsection (a)—

(1) Qualified revocable

trust. The term “qualified

revocable trust” means any

trust (or portion thereof)

which was treated under

section 676 as owned by the

decedent of the estate

referred to in subsection (a)

by reason of a power in the

grantor (determined without

regard to section 672(e)59

).

58 Rev. Proc. 98-13, 1998-1 CB 370, 3.02 last

sentence.

59 N.B.: This is the statute that treats powers held by

a grantor’s trust as held by the grantor.

(2) Applicable date. The

term “applicable date”

means—

(A) if no return

of tax

imposed by

chapter 11 is

required to

be filed, the

date which is

2 years after

the date of

the

decedent's

death, and

(B) if such a

return is

required to

be filed, the

date which is

6 months

after the date

of the final

determinatio

n of the

liability for

tax imposed

by chapter

11.

(c) Election. The election

under subsection (a) shall

be made not later than the

time prescribed for filing

the return of tax imposed by

this chapter for the first

taxable year of the estate

(determined with regard to

extensions) and, once made,

shall be irrevocable.

5.3 REV. PROC. 98-13

The procedure for making the election is found in

Rev. Proc. 98-13, 1998-1 CB 370. However,

Proposed Regulations were issued in December,

2000 setting forth slightly differing procedures.

Final regulations were made applicable to

decedents dying on or after December 24, 2002,

but for decedents dying prior to that date the old

rules (whatever they were) still apply.


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The following is taken from Rev. Proc. 98-13,60

except that I have updated the references from

§646 to 645 to reflect the redesignation of the

section by the IRS Restructuring and Reform Act

of 1998:

Both estates and trusts can function to

settle the affairs of a decedent and

distribute assets to heirs. In the case of a

revocable inter vivos trust, the grantor

transfers property to a trust that is

revocable during the grantor's lifetime.

When the grantor dies, the power to revoke

ceases and the trustee performs the

settlement functions typically performed

by an estate executor. H.R. Conf. Rep. No.

220, 105th Cong., 1st Sess. at 711 (1997).

Section 645(a) provides that if both the

executor (if any) of an estate and the

trustee of a qualified revocable trust elect

the treatment provided in section 645, such

trust shall be treated and taxed for income

tax purposes as part of such estate (and not

as a separate trust) for all taxable years of

the estate ending after the date of the

decedent's death and before the applicable

date, as defined in section 645(b)(2).

Section 645(b)(1) provides that the term

“qualified revocable trust” means any trust

(or portion thereof) that was treated under

section 676 as owned by the decedent by

reason of a power in the decedent to

revoke (determined without regard to

section 672(e)).

Section 645(b)(2) provides that the term

“applicable date” means – (A) if no estate

tax return is required to be filed, the date

that is 2 years after the date of the

decedent's death, and (B) if an estate tax

return is required to be filed, the date that

is 6 months after the date of the final

determination of the estate tax liability.

Section 645(c) provides that the election

under section 645(a) shall be made not

later than the time prescribed for filing the

60 Rev. Proc. 98-13, 1998-1 CB 370.

income tax return for the first taxable year

of the estate (determined with regard to

extensions), and once made, shall be

irrevocable.

3. Procedures and Requirements for

Making the Section 645 Election

.01 Required Statement.

To make the election, a required statement

must be attached to a Form 1041, U.S.

Income Tax Return for Estates and Trusts,

at the time and in the manner described in

this revenue procedure. The required

statement must:

(1) Identify the election as an election

made under section 645;

(2) Contain the name, address, date of

death, and taxpayer identification number

(TIN) of the decedent;

(3) Contain the qualified revocable trust's

name, address, and TIN. If the trust does

not have a TIN because the trust was

reporting pursuant to section 1.671-

4(b)(2)(i)(A) of the Income Tax

Regulations, the trustee must obtain a TIN

unless a Form 1041 does not have to be

filed under SECTION 3.03. See section

301.6109- 1(a)(2) of the Procedure and

Administrative Regulations;

(4) Contain the estate's name, address, and

TIN;

(5) Provide a representation that as of the

date of the decedent's death, the trust for

which the election is being made, or a

portion thereof, was treated under section

676 as owned by the decedent of the estate

referred to in section 645(a) by reason of a

power in the decedent to revoke

(determined without regard to section

672(e)); and

(6) Be signed and dated by both an

executor or administrator of the estate and

a trustee of the qualified revocable trust. If

there is more than one trustee, only one


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35

must sign the required statement, unless

otherwise required by the governing

instrument or by local law. Similarly, if

there is more than one executor, only one

must sign the required statement, unless

otherwise required by the governing

instrument or by local law.

If there is no probate estate and, hence, no

executor or administrator, the election may

still be made. In that case, a TIN must still

be obtained for the estate and only a trustee

of the qualified revocable trust must sign

the required statement; however, the

required statement must then include a

representation that there is no executor or

administrator and that neither an executor

nor an administrator will be appointed.

.02 Submission of the Required

Statement.

The original required statement must be

attached to the Form 1041 filed for the

estate for its first taxable year.

Additionally, except as provided in

SECTION 3.03, a copy of the required

statement must be attached to a Form

1041 filed for the trust for the taxable

year ending after the date of the

decedent's death. The election is

considered made when the original

required statement is attached to the Form

1041 filed for the estate's first taxable year,

or when a copy of the required statement is

attached to the Form 1041 filed for the

trust, whichever occurs first. Once made,

the election is effective from the date of

the decedent's death.

If the election is made, then the items of

the trust, including income, deductions and

credits, that are attributable to the qualified

revocable trust for the period subsequent to

the decedent's death must be excluded

from the Form 1041 filed for the trust for

the taxable year ending after the date of the

decedent's death and must be reported on

the estate's Form 1041.

If there is no executor or administrator and

neither one will be appointed, a trustee of

the qualified revocable trust must sign

every Form 1041 filed for the estate.

If a Form 1041 reporting the items of the

trust has already been filed for the trust for

its taxable year ending after the date of the

decedent's death without a copy of the

required statement attached to the form,

then the trust must file an amended Form

1041 and attach a copy of the required

statement to the amended form. The items

of the trust that are attributable to the

qualified revocable trust for the period

subsequent to the decedent's death must be

excluded from the amended Form 1041

and reported on the estate's Form 1041.

.03 A Form 1041 Does Not Have to be

Filed for Certain Trusts.

The trust61

does not have to file a Form

1041 for its taxable year ending after the

date of the decedent's death if the

following conditions are met: (1) The

Form 1041 for the estate's first taxable year

is filed before the due date for filing a

Form 1041 for the trust for the taxable year

ending after the date of the decedent's

death; (2) The trust items attributable to

the decedent are reported pursuant to

section 1.671-4(b)(2)(i)(A) or (B); and (3)

The entire trust is a qualified revocable

trust. [Emphasis added.]

* * * *

Note that if the trust does not have a TIN because

the trust was reporting under the alternate grantor

trust reporting requirements of Treas. Reg.

§1.671-4(b)(2)(i)(A), the trustee must obtain a

TIN unless a Form 1041 does not have to be filed.

If the election is made, then the items of the trust,

including income, deductions and credits, that are

attributable to the qualified revocable trust for the

period after the decedent's death must be excluded

from the Form 1041 filed for the trust for the

taxable year ending after the date of the decedent's

61 The estate would still have to make the election,

however.


A Panoply of Forms

36

death and must be reported on the estate's Form

1041.

Note that a trust making the election does not have

to file a Form 1041 for its taxable year ending

after the date of the decedent's death if the

following conditions are met:

(1) The Form 1041 for the estate's first

taxable year is filed before the due

date for filing a Form 1041 for the

trust for the taxable year ending

after the date of the decedent's

death;

(2) The trust items attributable to the

decedent are reported under the

alternate grantor trust reporting

rules of Treas. Reg. §1.671-

4(b)(2)(i)(A) or Treas. Reg.

§1.671-4(b)(2)(i)(B); and

(3) The entire trust is a qualified

revocable trust.

It is likely that [theDecedent] was reporting under

the alternate grantor trust reporting rules of Treas.

Reg. §1.671-4(b)(2)(i)(A) or Treas. Reg. §1.671-

4(b)(2)(i)(B) if a trust 1041 was not being

prepared in the past. Thus condition (2) would be

met. I assume that the entire trust was a qualified

revocable trust, meeting condition (3). So, if the

premises were correct, it appears to me that if

you file a Form 1041 for the estate before the

due date for filing the trust's Form 1041 for the

taxable year ending after [theDecedent]'s death

(April 15, _____), the trust will not have to

make the election, but the election will be made

by the estate alone.

5.4 WHAT ARE SOME OF THE

DIFFERENT TAX RULES APPLICABLE TO

TRUSTS AND ESTATES, IN THE ABSENCE

OF A §645 ELECTION?

If an administration is opened and an executor

appointed, the electing trust is treated, during the

election period, as part of the related estate for all

federal income tax purposes.

Although there are not an overwhelming number

of tax differences in the treatment of a probate

estate and trust, there are a few. A QRT is treated

as part of the related estate for purposes of the IRC

§642(c)(2) charitable set-aside deduction, for

example, but a post-death revocable trust is

allowed a charitable deduction only for amounts

paid to charities. Another difference is that the

IRC §1361(b)(1) subchapter S shareholder

requirements are not the same for estates and

trusts. The IRC §469(i)(4) special offset for rental

real estate activities also differs somewhat. The

active participation requirement under the passive

loss rules is waived for two years after the owner's

death in the case of estates, but not in the case of

revocable trusts.62

Finally, although trusts are

required to pay estimated income tax payments in

the same manner as individuals, estates are


taxable years.63

Presumably a QRT would also be

entitled to this benefit.

What are some of the reasons why you might want

to make the §645 election, other than

convenience? There are not very many, here are a

few, which could be important, and which may be

largely a restatement of the preceding paragraph,

but stated differently:

Estates are allowed a charitable deduction for

amounts permanently set aside for charitable

purposes while post-death revocable trusts are

allowed a charitable deduction only for

amounts paid to charities.

The active participation requirement under the

passive loss rules is waived in the case of

estates (but not revocable trusts) for two years

after the owner's death.

Estates can qualify for amortization of

reforestation expenditures, while trusts do not.

A revocable trust usually is forced to choose a

calendar year as its tax reporting year, while

an estate (under §645 or otherwise) can choose

a fiscal year end other than December 31.

An estate does not have to make quarterly

estimated income tax payments for two years,

but a trust does.

62 Treas. Reg. §1.645-1(e)(2)(i).

63 IRC §6654(l).


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37

5.5 APPLICATION OF THE SEPARATE

SHARE RULES.

Although items of income, deduction, and credit

of a QRT and related estate are combined for

purposes of computing the tax, IRC §663(c)

separate share rules may provide an exception to

this general rule.64

The separate share rule is an income tax notion

which determines who picks up the income earned

by the estate or QRT when distributions are made.

Whether a §645 election is made or not, the estate

or any trust that makes a distribution during the

year will be entitled to a distribution deduction for

its distributable net income (DNI). This deduction

is offset by the fact that the beneficiary/recipient

of the DNI picks up the income, and the estate or

distributing trust should prepare and send a Form

1099 to the recipient of the DNI. Since there may

be more than one beneficiary, and since

distributions may not be made proportionately

among them in accordance with their interests,

there are rules, called the “separate share” rules

that determine how and under what circumstances

the income is to be apportioned. If it is not

apportioned fairly, there may be a need to make an

“equitable adjustment” so that one beneficiary is

not stuck with all of the taxable income, while

another otherwise similarly situated beneficiary

gets tax-free income. These rules are too

complicated to discuss in detail here. This is

largely a matter that your accountant can help you

with, if the issue becomes relevant; and, in that

regard, I am, of course, available to consult with in

a difficult case.

64 Treas. Reg. §1.645-1(e)(2)(ii)(A).

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